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| | HIH All Out of Aces? By Robert Warne - February 28, 2001"You’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, know when to run." The words from Kenny Rogers’ tune The Gambler are indelible in Western lore, and, interestingly, parallel recent activities of HIH in a high-stakes California Workers’ Comp card game of claims.
HIH knew when to hold ‘em when they left the California Workers’ Comp market in 1995 following a profitable reign since entering the market in 1987. Due to uncertainties regarding future profitability, in 1995 key executives made the decision to pull HIH out of California. HIH’s timing was impeccable. In 1993 the total premium pool in California was in excess of $10 billion. By the end of 1995 the competitive environment had dramatically changed. This change, due primarily to open rating, cut the premium pool in half.
HIH’s decision to exit the California market was ingeniously full of insight. The executives predicted appropriately the consequences of open rating and capitalized on the circumstances. Leaving at the market’s peak put HIH in a powerful position that would enable them to re-enter California, not out of necessity, but when the time deemed appropriate for these Mavericks to move back—and cash in big once again.
In 1997 HIH re-entered California hoping to draw aces, with a master plan of buying back at the bottom after selling big on top. Calculations based on industry precedents indicated to HIH executives that the market would correct itself within a few years. This bold and opportune strategy must have looked and sounded flawless on paper. The reality, though, in retrospect, may be viewed as a critical timing blunder. This decision placed HIH in the midst of abnormal economic phenomena in the California Workers’ Comp market.
With premium as a percentage of payroll at its lowest level in a decade, and claim costs up by 50% since 1995, profit margins in California as of October 2000 were nothing like the good ol’ days. Geoffrey Cohen explained in his Chairman’s Address at the HIH Insurance 2000 Annual General Meeting that, "While there has been some recent market recovery, it is neither adequate nor necessarily sustainable." Other factors weighing heavy on HIH during the 2000 fiscal year were losses attributed to its United Kingdom Operations and its purchase in 1999 of FAI Insurances.
In his address Cohen stated, "Our key business imperative for the start of this millennium was to grow our retained earnings in order to facilitate further expansion of our Australian retail insurance portfolio and also to reinforce our capital position in the transition to the new Australian Prudential and Regulatory Authority (APRA) regime. Regrettably, the outcome of the year to 30 June 2000 was to diminish our capacity to achieve either of these objectives."
Faced with the reality of its financial position, HIH decided it was time to fold ’em while they still had something to fold, and sit this game out. On Oct. 30, 2000 HIH announced the sale of renewal rights to Alaska National Insurance Company. The deal included "other tangible assets associated with the large-account California Workers’ Compensation."
HIH would choose not to run from California, but rather just walk away. So on Oct. 31, HIH transformed its California operation into a managing general agency, which would generate fee income and fund the management of the run-off.
Industry analysts informed adjustercom.com that, "Alaska National agreed to purchase the California renewal rights from HIH for an ongoing commission-based fee. This scenario is estimated to span the length of three years and ideally free up capital progressively." The arrangement is viewed by HIH as a "strategic initiative with Alaska National, who has the goal of providing continuity of staff, distribution, and clients."
adjustercom.com has learned that currently a group of Alaska National employees are occupying an area within HIH’s San Francisco facility until they can open up their own office. An Alaska National representative stressed that employees are specifically handling the renewal process and have nothing to do with HIH’s run-off proceedings. For now, the representative told adjustercom.com that Alaska National plans to handle its new renewal account business from one location within California.
As for HIH’s attempt to reduce its exposure, some analysts feel that this run-off scenario is loaded with unavoidable risks, and would have preferred an outright sale of the U.S. business.
So far the saving grace for HIH has been its attempts to restructure its balance sheet, with a combination of leaving the U.S. and the announcement of a material transaction with Allianz. Analysts have looked upon these decisions, particularly the deal with Allianz, favorably.
If history repeats itself, HIH will once again fulfill its manifest destiny and move west to California for the Workers’ Comp market. A market where a fortune can be made overnight if the balance of premium rates, cost of claims and legislation, are tilted in your favor.
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