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The sale of the largest U.S. claims administrator, Sedgwick CMS Holdings Inc., to Fidelity National Financial Inc. in January has brought central focus to the third-party administrator/claims administration market.
To potential buyers, the highly fragmented market, comprised of 1,200 to 4,000 property/casualty and life/health claims management companies, appears increasingly attractive.
Outsourced business services have experienced rapid expansion during the past several years, with some estimates noting 10% annual market growth. The reason: TPAs have expertise in administration, technology to handle transaction volume/record maintenance, and knowledge of the complex laws and regulations dealing with insurance and employee benefits.
Claims administrators/TPAs have attractive fee income and low capital requirements, offer increasing profitability for the efficient operator and are prime candidates for consolidation. Large employers and associations that self-insure usually do not want to administer claims themselves. Even insurance companies find outsourced administration attractive for certain lines of business.
If the Sedgwick deal and other more recent deals are any indication, competition for TPA acquisitions will likely heat up in the coming year.
Information processors: In late December 2005, Fidelity National Financial-a provider of title insurance, financial processing software and services, and other products-announced its intention to acquire Sedgwick CMS for $635 million. Memphis, Tenn.-based Sedgwick CMS handles claims services that include workers compensation, general liability and disability.
Sedgwick is the largest claims administrator in the United States based on 2005 claims revenues of $361.6 million for self-insureds and third-largest in terms of total claims revenue.
This was the first claims administration acquisition for processor Fidelity National, but given its expertise in information processing, insurance and operating regulated entities, it is not a surprise that it would have an interest in this industry. Fidelity National followed in the footsteps of another information processor, Fiserv Inc., which owns claims administrator, Fiserv Health.
Insurance brokers/ insurance companies: A look at the largest claims administrators/TPAs shows a diversity of owners including insurance brokers such as Gallagher Bassett Services Inc. and insurance companies such as Hartford Financial Service Group Inc.'s Specialty Risk Services, ACE Ltd.'s ESIS Inc. and Trustmark Insurance Co. Inc.'s CoreSource.
Insurance companies have claims administration expertise, and a claims administrator can extend that expertise to the self-insured marketplace. Though, other insurers may view such arrangements as a detriment as they may be hesitant to give business to another insurance company.
Private equity players: Private equity firms also have become active in the TPA market. Interest has been driven by the growth potential in claims management services among large and midsized players, fee-based revenue, consolidation opportunities, increased profits through expense reductions and technology enhancements, an abundance of available debt capital, low capital expenditure requirements and attractive valuations for TPA companies. Players in the field include Platinum Equity L.L.C.'s Broadspire Services Inc. and Sun Capital Inc.'s Health Plan Holdings, though Broadspire will likely soon change ownership.
In 2003, private equity firm Platinum Equity acquired the claims administration and risk management services of Kemper Insurance Cos., which was renamed Broadspire.
In early April, Broadspire announced the sale of its disability administration business to Aetna Inc. for about $160 million and last month Crawford announced that it had agreed to buy the rest of Broadspire for $150 million.
Also in April, private equity firm GTCR Golder Rauner L.L.C. announced that one of its portfolio companies, Solera Inc., had completed the acquisition of Automatic Data Processing Inc.'s Claims Services Group for $975 million.
Solera, a provider of consulting, outsourced services and strategic technology solutions focused on claims, will reap the benefits of CSG's operating companies, revenues in excess of $410 million and a global network of customers/associates in 31 countries.
And in May, New York-based Odyssey Investment Partners L.L.C., a private equity fund, completed its acquisition of Parsippany, N.J.-based York Insurance Services Group Inc., an outsourcer of specialty claims management services.
Also, global investment group Investcorp Inc. agreed last September to buy CCC Information Services Group Inc., which sells software for auto claims processing.
TPAs: As noted above, Crawford announced plans to buy Broadspire last month, but the Broadspire name will be retained. The deal is expected to close in the fourth quarter.
In addition, some TPAs may find it difficult to compete with the scale and technology of total benefit outsourcing firms.
As a result, the TPA market has seen smaller firms join forces or sell to larger entities. We would expect this trend to continue.
There are several thousand claims administrators/TPAs, including those with full and limited service, that are ripe for consolidation. In assessing the TPA market, potential acquirers may seek the following company attributes:
Technology: Claims management has an increasing reliance on technology vs. telephone/paper claims; TPAs should highlight their technological efficiencies/expertise, and detail capital committed to system advancement.
Administration: Business can be sensitive to competition and profitability can depend on efficiency of administration. The hassle, cost and timing of changing administrators can make business fairly loyal if an administrator is doing a good job. Given the increasing laws and regulations that have to be kept up to date as well as the employee turnover and volume of transactions, an efficient operator can mean the difference in profit or not.
Service: Typically, the smaller TPAs have emphasized service and their willingness to do just about anything for clients, such as customizing plan designs and conducting detailed claims reporting. Offering consumer-driven products can be an added benefit; TPAs can integrate a program to include services such as determining eligibility, utilization review and program communications management.
Large insurance companies, brokers, private equity firms and other TPAs that are looking to complement their product line/geographic reach may begin picking off TPAs at attractive prices as healthy economic conditions allow sellers to monetize their ownership positions at favorable levels.
The best deals will be those that allow the TPA continued growth with a lower operating structure. The TPA/claims administration market appears to be entering a dynamic time; watch for future developments.
Linda Garner is a managing director at Little Rock, Ark.-based Stephens Inc., where she specializes in insurance/insurance broker/insurance services investment banking and is a former Arkansas insurance commissioner.