FOUNDATION HEALTH: Puts Five Units On The Block
Foundation Health Systems Inc. has announced plans to sell five of its six Business Insurance Group divisions, the Sacramento Business Journal reports. The company plans to sell California Compensation Insurance Co., the largest private workers' comp insurance carrier in the state; "Combined Benefits Life Insurance Co., the 24-hour care portion of workers' comp insurance"; Business Insurance Co., "which offers workers' comp in more than 42 states outside California;" Foundation Integrated Risk Management Solutions Inc., "one of the largest workers' comp risk management and third-party claims administrators in California"; and Claims Technical Services, "which provides temporary employees for the insurance industry." Estimates of the worth of the divisions range from $350 million to $600 million. David Olson, Foundation's vice president for investor relations, said that a "decision will be made this quarter." He said, "We are engaged in a very methodical, careful process on this. It's moving forward, but we are now at a critical juncture and cannot comment further."
According to analyst Mary O'Connell, "the most likely buyers could be insurers already involved in workers' comp who see CalComp as a way to grab more market share." Russ Johnson, an analyst with Piper Jaffray in Minneapolis, said that "[l]ow rates and strong competition make it tough for carriers to expand their workers' comp business" -- a problem potentially solved by buying a company with established market share. Financial documents filed with the SEC in November 1997 show that Foundation is "not making much [money from] its workers' comp business." For the first nine months of 1997, Foundation reported net income of $20.4 million -- down 63% from net income of $55.1 million for the same period in 1996. Some industry analysts say that buyers "may hesitate due to Foundation's tendency to under-reserve at Cal Comp, suggesting that rates may have to be raised simply to meet state regulatory requirements." O'Connell said, "Foundation has claimed over the years that they're profitable in this because they are so good at managed care. But as a general rule, they've been dependent on reserves." A.M. Best Co. "gives the three workers' comp components ... an A minus, or excellent, rating, but said the group's rating outlook is 'negative'" (Robertson/Johnson, 2/2 issue).