Bob Hartwig – fast, frenetic, and fascinating

In one of his final appearances as President of III, Bob Hartwig PhD dove into the sharing or “gig” economy.

In a futile attempt to keep up with Bob’s frenetic pace, here’s my as-it-happens recording of his main points…

  • insurance is evolving to address coverage gaps for those who drive for Uber and Lyft, rent rooms via AirBnB, do work via TaskRabbit or Handy or laundry via Washio.
  • lots of variation by state e.g. Uber drivers are employees in CA but not in other states
  • smartphone usage is driving this – 50% of all adults worldwide have one – because it costs nothing to pair labor with demand – a revolutionary change
  • the tradition of the “good job” is only 135 years old…
  • Optimisitic folks think this frees workers from centraiized, often sclerotic  firms, enables workers to get paid more and work where they want when they want
  • Pessimistic folks see many jobs disappearing, the end of benefits, no investment in training and an increasingly difficult environment for those with low skills and education.
  • 22% of Americans have offered services in the sharing economy, most are male, young, minority, and urban.  All, coincidentally, categories at higher risk for work comp injury.
  • 71% of sharers are positive about the experience, AND 58% agree that the industry is exploiting a lack of regulation.
  • many “sharing” jobs are subject to automation
    • think Uber drivers – but its going to take a while (I disagree, it’s coming much faster than Hartwig thinks)


Will Banjo be the social media app that revolutionizes insurance?

It sure looks to be the front runner now.

Banjo consolidates all social media feeds into a single platform in real time, then maps then on a geographic grid so users can see what is happening instantly anywhere.

It’s an “event-detection engine”.

Ok, that’s cool.

What’s really useful is Banjo also establishes a baseline activity ‘profile’ (my word, not theirs) and triggers an alert when one of 35 billion geographic grid cells (each about the same size as a soccer field) goes “abnormal”.  And, users can look back in time to see what was happening just before the triggering event, and monitor how that event unfolded…

Want to track a hurricane and damage therefrom?

See where a tornado is headed?

Know instantly when a violent incident erupts?

Follow a demonstration in Egypt’s Tahrir Square as it moves and evolves?

Know which of your band’s songs are getting the most shout-outs?

See if an insured walked away from a “supposedly debilitating crash”?

The app has been used successfully to do all that and more.  Founded by perhaps the most eclectic entrepreneur in high-tech, a high-school dropout, former NASCAR crew chief, Navy veteran, crime-scene investigation expert turned coder, Banjo is now being used by a diverse group of commercial enterprises who want/need to find out instantly about key events happening anywhere – or in very specific places – around the world.

According to Inc., Banjo:

shows only geolocated public posts made from mobile devices; those posts are drawn from what [CEO Damien] Patton calls a “world feed” he’s created by aggregating more than a dozen major social networks (and counting), from Twitter to Instagram to Russia’s VKontakte to China’s Weibo…with all of the public posts in [a small geographic] area appearing as pins on the map and as cards, complete with text, photos, and video, alongside it. All this in real time.

What does this mean for you?

Early adopters are going to know sooner so they can react faster, and possibly profit more.


TRIA’s renewed, and this means…

Well, that’s a relief. In a welcome display of bipartisanship, Congress passed and the President signed into law a six-year renewal of TRIA.  Here’s how AIA described the key elements and changes to the program:

Under the six-year extension in the bill, starting in 2016, there will be phased-in increases to the program’s trigger (raising it from $100 million to $200 million in annual aggregate insured losses) and the insurer co-share (raising it from 15 percent to 20 percent).  In addition, the bill phases in an increase in the aggregate amount of insured terrorism losses required to be borne by the private sector from the current $27.5 billion to $37.5 billion. Any use of taxpayer dollars to fund those losses would be recouped post-event.

I interviewed AIA Associate General Counsel and work comp expert Bruce Wood via email to get his take on the news.

MCM – What does this mean for workers’ comp?

Bruce – The extension of TRIA eliminates the uncertainty hovering over workers’ compensation insurers in providing coverage where the ultimate risk of loss is unascertainable because of the inability to exclude terrorism losses from workers’ compensation.

MCM – Some have criticized TRIA as unnecessary; can you speak to that?

Bruce – Some critics of TRIA have said not to worry, that employers would simply be written through residual markets.  But, it is insurers who backstop the losses in residual markets. In a state with a state fund serving also as the market of last resort, the backstop is either the state’s taxpayers or the state guaranty fund.  And, who backstops the guaranty funds?  The same insurers.

The ultimate irony for those who have criticized an extension of TRIA because it puts the government at risk is that without TRIA, the government is at even greater risk, as all losses would end up being socialized.

MCM – What about large, self-insured employers?

Extending TRIA also is beneficial to employers self-insuring, because they will be able to secure sufficient excess coverage to remain self-insured.  After 9-11, we saw some migration from the self-insurance market to the insured residual market because self-insured employers were unable to secure adequate excess coverage.  These included here is Washington, high-profile risks such as the Washington Post and the Kennedy Center for the Performing Arts.

What does this mean for you?

Six years of certainty – at least about this exposure.


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
  • 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 marginallyprofitable 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.