Bermuda firm takes over Sierra workers’ comp subsidiary

Michelle Swafford

Wednesday, Nov. 26, 2003 | 11:09 a.m.

Sierra Health Services Inc. of Las Vegas announced Tuesday it reached an agreement to dispose of its workers' compensation insurance subsidiary, a deal leaving about 50 employees in Las Vegas and California without jobs.

Folksamerica Holdings Co. Inc., a subsidiary of Bermuda-based White Mountains Insurance Group Ltd., will purchase the workers' compensation company, California Indemnity Insurance Co. Inc., from Sierra Health. Folksamerica, which has corporate offices in New York, is a broker's reinsurer, which means it assumes the risk of other insurance companies.

Folksamerica will maintain current policies until they expire, typically within a year, and handle ongoing claims that occur during the policies' effective dates. Folksamerica will not assume any infrastructure or employees.

There are approximately 4,500 policies in effect in nine Midwest and West states and about 300 employees run the operation. Between 50 and 55 employees who sell or underwrite new policies will immediately be let go and the other jobs will be phased out as the business winds down, said Peter O'Neill, vice president of public and investor relations.

O'Neill said the employees who will be immediately affected work in Las Vegas and California offices, but he did not know how many were in each office.

All policyholders will have to find a new carrier once their policies expire, but any outstanding claims will be maintained. Sierra Health said it's looking for a new insurance company to take over all the policies once they expire. Most companies it has talked with are primarily interested in Nevada policies because of the tough market in California, which has the bulk of the policies, said Paul Palmer, chief financial officer for Sierra Health.

Folksamerica purchased the company, worth $90.7 million in net assets as of Sept. 30, to "assist Sierra in reaching their goal of exiting the property and casualty business so that it may focus on its ongoing core operations," Folksamerica Chief Executive Steve Fass said in a statement.

Folksamerica officials could not be reached to elaborate on the deal. Palmer said the deal is primarily an investment for Folksamerica.

"They will try to make money in investing the assets at a higher return," Palmer said. "They're really buying this as a runout business. They're not interested in expanding it. That's not the business this subsidiary is in."

He said insurance companies such as Folksamerica invest the premiums they collect until they have to pay on claims. Folksamerica will acquire the premiums Sierra Health's subsidiary has already collected.

A third-party administrator is being sought to manage all the claims, which will be processed using Sierra Health's current staff.

It is more efficient for Folksamerica to contract with a third party than hire a staff to process a dwindling number of claims, Palmer said.

He said Sierra Health will keep Nevada Administrators, the third-party administrator portion of its self-insured workers' compensation business. Nevada Administrators is a separate entity from the other workers' compensation business and manages claims for 30 to 40 companies in Nevada.

The agreement is expected to close in the first quarter of 2004 and Sierra Health will receive $15.5 million in cash at that time. A contingency payment of up to $64 million is available to Sierra Health in January 2010.

If the claims do not negatively affect Folksamerica's reserves, Sierra Health will receive about $64 million, O'Neill said.

"It is very difficult for any insurer to know what it is going to need in reserves to pay these claims," he said. "Policies are good for a year. Claims could go on for years. The best case example is a back injury, which could go on for many, many years."

The workers' compensation industry as a whole has not reserved enough, he said.

At the end of the fourth quarter, Sierra Health will record an expense of between $15 million and $20 million, which includes the difference between the sale price and the value of the workers' compensation subsidiary.

The Nevada Division of Insurance said it has the right to review the deal if it substantially lessens competition, but the main overseer would be the California insurance commissioner.

Sierra Health announced in January it planned to seek alternatives for the workers' compensation subsidiary because it is not a core operation of the managed-care company, O'Neill said.

He said years ago, most managed care companies had a workers' compensation component, but the trend is to sell them and Sierra Health is one of the few companies that still have one.

O'Neill said the workers' compensation subsidiary has been profitable in the past and continues to be now, but the industry as a whole has been challenged because of rising costs.