York’s acquisition of MCMC is done

There won’t be an official announcement, but word will go out to employees tomorrow – the long-pending York-MCMC deal is done.

I spoke at length with a (very) senior York executive earlier today; this person did not want his/her name used, not to maintain confidentiality, but to keep the focus where the company wants it to be – on MCMC and Wellcomp and management of those organizations.

MCMC will remain intact, as will Wellcomp, York’s medical management subsidiary.  Mike Lindberg will continue to run MCMC and Doug Markham stays in the top spot at Wellcomp with no changes to management or operations at either organization.  Unlike other “business as usual” pronouncements we’ve read of late (TechHealth, Genex among them), I take this at face value.  The parent company is looking to enhance MCMC’s offerings with services provided by Wellcomp and vice versa, the idea being prospects and customers can get a broader array of services from the overall entity.

From an organizational standpoint, both MCMC and Wellcomp will report up to the overall holding company.

One concern I’ve heard is that York will pull MCMC back from some of their carrier/TPA relationships, this will NOT happen.  First, it makes no sense financially; a lot of MCMC’s revenue comes from other payers.  Second, York currently provides claims and other services to lots of insurance carriers and other payers; MCMC’s diverse client portfolio sort of mimics York’s.

What does this mean for you?

Back to the lede – no official announcement is coming because York and MCMC don’t want to raise concerns about potential changes.  That’s also one of the main reasons they didn’t hurry to get it done so it could be announced in Las Vegas; it isn’t about creating a PR buzz, it’s about stability.

From what I hear from people I trust, there shouldn’t be concerns.

Bob Hartwig – drinking from the firehose

The always-entertaining and enlightening Bob Hartwig of the Insurance Information Institute was next on the podium – he violates a bunch of “presenting rules” (chiefly talking really fast) and is thereby proof that you can be a very good and very effective presenter by doing what works for you.

His view is historical trends indicate we are a few years away from a return to the bottom side of the insurance cycle.  I hope that’s true, but I’m less sanguine.

On the overall economy, he’s predicting growth of around 3% in GDP over the next few years along with a drop in the unemployment rate to below 6 percent (possibly) before the end of the year.  That would be good news – for work comp – indeed especially as it comes on top of the addition of over 9 million jobs since April 2010 (even more in the private sector).

Other good news:

  • hours worked per week are up to almost pre-recession levels
  • average hour day continues to slowly increase, it’s up 14.4 percent since the beginning of the recession.

Growth is going to come in high-frequency industries; construction manufacturing and energy will be big drivers. Construction employment alone is up 565k since January of 2011; we’re still over 1.6 million jobs down from the height just before the crash, altho that was a bubble-driven number.

Manufacturing employment is up 640,000, and those workers are making more stuff than just before the recession, even though there are fewer of them.  That means productivity is higher.

Of course, health care employment is up dramatically as well, and will grow faster than any other sector – adding 3 million new jobs over the next 8 years.  Energy exploration, production and transport will be another big driver.  Employment in this sector is higher than any time in the last 28 years and is going to increase even more.

The net?  Lots more employment in high wage sectors are ‘unambiguous positives for the workers comp sector.”

Friday catch up and idle speculation

Lots of big info out this week, and a few tidbits about pending deals in the workers’ comp services space too.  Here are the highlights…(for the latest on deals in the work comp space, scroll down)

There’s a lot of confusion about the Obamacare signups; I’ll cover this in detail next week, but here are the facts as of today…

  • more than 7.1 million signed up via the federal and state exchanges (we won’t know the total for a week or so as some state exchanges haven’t posted final March numbers)
  • a lot more – i’d guess a million to two million – bought insurance via the private exchanges
  • about 20 percent won’t pay the premium and there’s some duplication between all the exchanges and other enrollment methods for reasons we’ll discuss next week
  • more than 5 million MORE Americans have insurance today than at the end of 2013.

The net – Obamacare has increased coverage substantially; the uninsurance rate has dropped by 2.7 points.

Meanwhile, Fitch reports the P&C industry is doing just grand, thank you.  Profits are up, loss ratios declined, underwriting margins are improving, and revenue is too.  Thank the continued hard market and expanding economy.

Work comp is doing better as well, altho there’s still a negative underwriting margin.  It remains to be seen if pricing discipline holds, or if some big carriers cross the stupid line.

The “doc fix” is in; Congress passed and the President signed a bill that will increase Medicare reimbursement for physicians by 0.5% for the next 12 months. The bill also:

  • delays implementation of ICD-10 for a year till October 2015 – for an excellent discussion of how this will affect workers’ comp, read Sandy Blunt’s piece at workers compensation.com
  • and does some other stuff which you probably don’t care about and I won’t bore you with.

Work comp services Coventry is trying to sell their marginally-profitable work comp service business lines - we’re talking CM, UM, MSA, peer review, and likely pharmacy. They will NOT be selling the jewels – bill review and the network, because a) they make huge profits; b) bill review really isn’t sellable as the application is quite dated and would require the buyer to transition to a different platform likely resulting in customer defections; and c) they can’t sell the network.

Coincidentally, another large case management firm is also for sale; word is Apax/OneCallCareManagement is currently the leading contender; most likely they will add the asset to their ever-growing list of companies.

And I’d be remiss if I didn’t speculate that Apax is looking hard at the Coventry assets as well. OCCM CEO Joe Delaney has certainly proved himself a competent manager, but methinks the thought of adding these two to the portfolio would give even the best of execs pause…

Enjoy the weekend, watch some baseball, get out in the gardens, and ride your bike.

Sedgwick under KKR – quick takes

Talked with several folks in the industry about this deal, including Sedgwick CEO Dave North.  Couple points worth highlighting.

This has nothing to do with Mitchell International and there will not be any combination of the companies.  

For some reason a few folks are advancing the theory that there is some grand strategy at KKR involving buying up some/most/all work comp service firms (I exaggerate, I know) to build some Mega-Corp that will own the industry.

Please disabuse yourself of this notion.  Of course, KKR sees work comp services/P&C services as an attractive market, but that does NOT mean they are looking to mush a bunch of disparate entities together.  According to North, he “hasn’t had a word with anyone from Mitchell and there is nothing that is part of this deal that contemplates Mitchell as part of the scenario.”

I believe him.

As a side note, Stone Point (current owner of Sedgwick) owns/has owned several other work comp services businesses including Cunningham Lindsay and Genex.  There was very little communication between these entities, and a lot of competition.

Moreover, investment companies aren’t monolithic; they manage different internal investment funds, with different outside investors in those funds.  It is highly likely the investors in Mitchell are NOT the same as those buying into Sedgwick.

Sedgwick management is sticking around; many have also invested in the company going forward. That’s from several internal sources.

Finally, while management is staying, the same business model will be followed, and Sedgwick will remain Sedgwick, there will be changes – as North noted, “any time you have the backing of a company like KKR there should be opportunities for change that didn’t exist in the past.”

KKR is huge, has tremendous resources, and may well decide to deploy some of them to further enhance their new asset.  But they certainly wouldn’t have bought Sedgwick with the assumption they would make big changes.

You don’t pay a multiple in the double digits for a company that needs major changes.

Sedgwick’s been acquired

Investment firm KKR will buy a “majority interest” in TPA Sedgwick for $2.4 billion in a deal announced officially minutes ago.

The transaction is the latest of several high-multiple deals for workers’ comp assets, second only in size to Apax’s total cost for the combined OneCall/Align transactions. Estimates of the valuation are in the 11-12x on a trailing basis or perhaps around 10x of forecast earnings.  However, what isn’t known is exactly how much of Sedgwick KKR bought. It is likely management owns a piece of the company; I’d be somewhat surprised if the sellers – Hellman & Friedman and Stone Point – retain any significant stake.  I would speculate that the total valuation – after accounting for minority ownership – is between 10x – 11x of forecast earnings.

(I need to revise my expectations, as I’d forecast a sale price of “as much as $2.4 billion.”

Regardless, a double-digit valuation for a TPA is a pretty rare occurrence.

So, what does this mean?

First, there’s been no decrease in deal flow in the work comp space, and there are at least two others in process.  At some point this will slow down/end, perhaps because there’s nothing left to buy and/or prices get so high that even the most enthusiastic will stop bidding.

Second, investors that have been bidding on assets are now selling into the market. This tells me they see the opportunity as pretty darn attractive, making it hard to hold on to investments when they can sell them for double digit multiples.  Arguing with myself, perhaps this implies the deals will continue as today’s owners find the returns just too good to pass up.

Third, I’d expect current management will stay at Sedgwick.  Dave North et al have made the current investors happy indeed (doubling the value in four years), and KKR will want to continue that trajectory.  I don’t see North as ready to ride into the sunset just yet.

Fourth, don’t look for any combination of Sedgwick and KKR’s other recent P&C acquisition, Mitchell International.  Too much channel conflict, very different companies, little overlap, and synergies would be relatively small.

Fifth, times are relatively good for TPAs these days; that said the competition should see this as a loud and sustained wakeup call. New owners will demand even more top-line and bottom-line growth from Sedgwick, so expect they’ll be as competitive as ever – if not more so.

 

 

Is Sedgwick for sale?

Yes.  For the right price.

Hellman & Friedman and Stone Point Capital (Sedwick’s owners) have owned the company for 3 1/2 years, paying $1.1 billion in April of 2010.  Reports indicate Sedgwick’s earnings are around $200 million. With current multiples above 10x, a price in the $2 billion range is certainly possible; don’t be shocked if the final deal is worth as much as $2.4 billion.

There are a host of reasons for the TPA’s current owners to sell the company, with the primary reason likely the high valuations currently on offer.  Doubling one’s money over four years is reason enough for the owners to consider a deal; when one considers the (high) likelihood that H&F and Stone Point undoubtedly leveraged the deal, the RoI picture becomes even more compelling.

That said, whoever buys the company will only pay a premium if they see a clear path to significant profitable growth for Sedgwick.  After acquiring many service functions (e.g. investigations, MSAs) to deliver them in-house, signing deals with most vendors to share revenues, and acquiring other TPAs, there isn’t much else that can be done to jack up margins.  Thus, it is all about the future.

And for now, the future looks bright.  As P&C premiums continue to trend upwards, self-insurance is booming, driving more revenue and profit for TPAs.  Several privately-held TPAs (York, CCMSI, TriStar - currently the largest) have grown nicely of late, and may find they are attractive acquisition candidates sometime down the road.

That said, competition in the P&C TPA business is fierce.  Gallagher-Bassett is making moves to add expertise and strengthen its offering, streamlining processes and becoming more flexible. Broadspire has been adding significant business of late.  And very large self-insureds are becoming increasingly demanding, forcing TPAs to incur significant costs to develop applications, processes, and expertise required by powerful risk managers.

All in all, it looks like the time is now to sell Sedgwick.  

Stay tuned…

Medicare, MSAs, the SMART Act, and your taxes

I’ve long avoided getting into the Medicare Set-Aside issue for a bunch of reasons; it’s highly esoteric, requires deep knowledge, is ever-changing, can get pretty nasty and getting educated about MSAs would come with a high opportunity cost – I wouldn’t be able to do any real work for a couple months.

But never one to waste an opportunity to stick my neck into the noose, here goes.  First, my admittedly ill-informed view.

CMS’ failure to a) make rational decisions pertaining to future costs and treatment and b) provide intelligent guidance to P&C payers is a travesty. 

For CMS to assume that any current treatment will continue forever, at current prices, with current (brand) drugs, when any sane person knows that is absolutely NOT going to happen, is nuts.

Passage of the SMART Act helps address several key problems, but there is still much to be addressed before insurers can feel comfortable settling claims – comfortable that they aren’t getting screwed, comfortable that CMS isn’t going to come back and ask for more money, comfortable that the process, methodology, and calculations are actually somewhat stable – if not rational.  Certainty is the goal here, and we’re still well short of that.

Leaving aside the debacle that has been CMS’ attempt to implement a law passed by Congress (with little guidance as to how to actually implement Congress’ wishes), there’s a different issue that deserves mention – why MSAs?

Their purpose is to ensure that taxpayers don’t have to pay for care that should be covered by another entity.  And I’m very much OK with that.  As a taxpayer and contributor to Medicare’s funding, I don’t want my tax dollars spent on care that should be paid for by someone else.  I doubt anyone does.

Therein lies the rub.  Reality is, for decades, we taxpayers have been footing the bill for medical care consumed by workers comp claimants, to the tune of tens/scores/hundreds of millions of dollars (pick one).  That was great for those on the hook for WC claims and premiums, not great for taxpayers.

So, on the one hand, I think everyone (except maybe CFOs at and owners of P&C carriers) supports the IDEA of the Secondary Payer Act.  On the other hand, making the idea a reality has been a(n) mess/disaster/embarrassment. But on the third hand, it is necessary.

I know, commenting on something so obvious may seem like a waste of pixels.  But it’s good to know CMS is actually trying to save taxpayers’ dollars.

Now if they could only figure out how.

 

 

 

 

The RIMS Conference and workers comp

While the annual Risk Insurance Management Society Conference is among the largest property and casualty conventions, if you’re looking for the latest information re workers’ comp you will have to go elsewhere.

[disclosure - I've keynoted the two main WC conferences over the last year, and was heavily involved in programming for one of them]

I’ve come to this conclusion after attending a dozen or more RIMS shows over the years and working with several entities submitting conference sessions; almost all were rejected.  This year, the Conference planners rejected a session entitled “Attacking the Opioid Crisis in Workers’ Compensation”. This “thanks but no thanks” led me to conclude RIMS just isn’t that interested in, focused on, or perhaps aware of issues relevant to workers’ comp. [more disclosure - I was one of the speakers proposed for the opioid session]

There is no issue more salient, timely, or significant than the opioid crisis, and exposing risk managers and industry executives to this issue would have helped them understand just how critical the situation is.

Reports from the major research institutions linking opioid use to increased medical costs, longer disability duration, and poor outcomes have certainly raised the profile of this issue; The Workers Compensation Institute had several sessions on the topic; the New York Times has seen fit to publish a major article on the impact of opioids on claimants and payers; the National Workers’ Comp and Disability Conference has an entire track on opioids; the American Insurance Association has made addressing the issue a top priority; NCOIL had a lengthy session on the issue at their last meeting and is doing the same at their next get-together.

That’s not to say RIMS doesn’t have some quality sessions – this year’s overview of health reform was well done- but in general WC sessions are few and tend to be basic.

That may well be intentional; RIMS’ audience tends to be less-work-comp-specific than the attendees at the other major conferences cited above.

That said, opioids’ impact on workers’ comp is a topic worthy of attention by the leading P&C industry conference.

Taxpayers’ profit on AIG bailout

Yesterday brought the welcome news that the Fed completed the sale of the last of its AG holdings, generating a profit of $6.6 billion.
In total, taxpayers have earned almost $18 billion dollars from the Fed’s investment in AIG and subsequent sale of the company’s assets. We still own 53% of AIG, whose stock is up 46% so far this year.
The highly-controversial decision to use federal funds (taxpayer dollars) to prevent the meltdown of what was then the largest P&C insurer in the nation required $125 billion.
I – and everyone else – am happy and relieved that our dollars didn’t disappear. That said, I’m sure we’re all hoping we don’t have to make that kind of a bet again. What happened to AIG – a relatively tiny subsidiary somehow bankrupted a huge company – can’t be allowed to happen again.
AIG was so deeply entwined in international finance and business that we had no choice but to bail the company out when their investments in credit derivatives went horribly bad. While some would argue that government should have let the chips fall where they may, the cost – to individuals, taxpayers, governments, the economy, businesses – would have been catastrophic.
If the catastrophe was limited to AIG and its shareholders, fine – let ‘em suffer. But it wouldn’t have been. In fact, thousands of companies, millions of individuals, hundreds of governmental entities would have been bankrupted/forced out of business/left without pensions if AIG had disappeared.
It’s one thing to talk tough about some fat-cat finance guy losing his Bentley and Gulfstream; it’s a whole different thing when your neighbors lose their pensions. And there’s no question an unmanaged bankruptcy of AIG would have led to that, and other consequences. Such as:
- AIG had very close financial ties to many European banks, ties that would have brought those banks down and done major damage to that continent’s economy.
- AIG provided the underpinning for many pension funds and retirement plans; its financial instruments guaranteed the returns for pensioners.
- It owned many of the airlines’ airplanes, planes that might have been repossessed if AIG went under.
- AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation.
- It was a large individual auto insurer as well.
- AIG insured billions of dollars of cargo in transit across the world’s oceans; a bankruptcy would have increased costs significantly.
- AIG insured many other financial institutions against the risk of loss from those institutions’ investments. If that insurance was no longer there, the other financial institutions would have had to dramatically change their financial projections – which may well have led to their demise.
I’m no economist but it is abundantly clear an unmanaged bankruptcy could well have led to a world-wide depression of frightening proportions. The feds had to choose between a bad choice and a horrible one – and they chose the bad one.
Of late AIG has been a big buyer of non-government backed mortgage securities, adding stability to the housing market – a key to continuing the economic recovery.
What does this mean for you?
Let’s hope our elected officials are paying attention.

The (second to) Last Word on the AIG bailout

We taxpayers agreed to pony up $182.5 billion to bail out AIG after the credit derivative debacle (well, mostly we taxpayers). There were two criticisms of the deal; first that the government should allow the market to determine winners and losers, and second that we’d lose our money. First, the second criticism.
As of yesterday, the Federal Reserve got all its money back plus more. AIG (now doing business as Chartis) announced it has repaid all the Fed money it borrowed (it did not need $21 of the $182.5 billion) and dramatically reduced the amount it owes the US Treasury.
To date, AIG has paid back about $152 billion.
While most of these dollars came from the sale of assets – insurance companies, leasing companies, and other subsidiaries of AIG, this would not have happened if not for significant improvements in the company’s ongoing operations.
That is a credit to the Chartis employees who suffered – and I do mean suffered – through the brutal conditions after AIG’s credit derivative investment group damn near killed the whole company, and a good chunk of the world economy along with it. Whether it was navigating the crowds of protestors outside company buildings, avoiding neighbors at cocktail parties and cookouts, testifying before regulators and Congress, or talking to customers, brokers and prospects, the late summer and fall of 2008 were just awful.
Chartis still has significant issues (excess work comp book is a big one), but CEO Benmosche has the company back on the right track. And thanks to those who stayed and fixed Chartis, the Fed has actually made a profit on that bailout – a profit of at least $3 billion and probably twice that.
In regard to the first complaint about the bailout, there’s a legitimate argument to be made that governments should not bail out companies that fail. In the case of AIG, I believe that’s not the case, for two reasons.
First, inadequate regulations undoubtedly played a part in the credit derivative issue. Thus, government was somewhat responsible for the disaster, and we – the people – are the government. We “allowed” AIG to made those now-obviously-incredibly-stupid investments (isn’t hindsight great?), so, because the problems inherent in a failure of AIG were so monumental, we have to share the responsibility for fixing the problem.
Second, AIG had its fingers in so many aspects of global finance that a failure would have been more than a disaster – it would have cratered the world economy and devastated many individuals, companies, and families. As I noted back in 2009, “AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines’ airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well.”
Thanks to WorkCompCentral for the head’s up.