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.

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.

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.

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.

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…

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.