Is merger of TPA giants a precursor of more consolidation?Posted On: Jul. 17, 2019 6:29 AM CST
The combination of two of the top five third-party administrators portends a trend of continued consolidation in the sector, with competing TPAs needing to examine their own operations and consider future acquisitions, experts say.
Memphis, Tennessee-based Sedgwick Claims Management Services Inc., the largest TPA with $2.7 billion in gross revenue in 2018 according to Business Insurance’s latest ranking, announced last week it had agreed to acquire fellow top 10 third-party administrator York Risk Services Group Inc., the fifth-largest TPA with $800 million in revenues last year, in a transaction expected to close later this year — terms were not disclosed. The deal is seen as adding scale and revenue diversity for Sedgwick, but also integration risk, according to analysts.
“Fundamentally, it’s seems like a rational response to an overpopulated industry,” said Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore.
Parsippany, New Jersey-based York derives 43% of its revenue from managing workers comp and other property/casualty and general liability lines, 43% from its managed care division focusing on medical cost containment for workers comp claims, and 14% from its pooling, risk control and technology solutions division that works with public entities and corporate captives, according to a credit opinion issued by Moody’s Investors Service Inc. in June.
“It gives us more scale in workers compensation and property and liability and some of those core lines in the United States where they’re primarily located, where we will now have more people in more places to do more things for customers, and that’s really what drives it,” said Dave North, Sedgwick president and CEO. “Second, they’re doing some things in spaces where Sedgwick was not a big player, primarily in pools and associations and public entities, where they have really established a very strong reputation.”
York has taken “significant steps to strengthen its revenues and profitability such as investing in sales, infrastructure, upgrading technology and reengineering various processes,” according to Moody’s.
“York has been in transformation mode and they have been trying to become more efficient,” said Paulette Truman, New York-based vice president and senior analyst for Moody’s. “They’ve already restructured, so perhaps there won’t be a need to do massive restructuring once they merge with Sedgwick.”
Risk and comp managers responsible for selecting third-party administrators should not be too concerned about York being acquired by Sedgwick because the TPA market is still extremely competitive, according to several experts.
“I think the perception of less choice is more than the reality of less choice,” said Michael Stack, Kennebunkport, Maine-based chief executive officer for Amaxx LLC, which provides workers compensation consulting services. “There are still plenty of options available for employers that are looking for a good partner in their claims handling experience. As an employer, you only need one to work with one — you don’t need to work with 10.”
But Dennis Tierney, Marsh LLC’s national director of workers compensation claims based in Norwalk, Connecticut, said consolidation has led the majority of clients to express concerns about reduced competition and fewer options in the marketplace, the possibility that the quality of claim services will decline as the TPAs focus on integrating their operations, and challenges from the integration of different claims systems, as well as relationship disruptions.
“We’re getting close to a point where it’s going to be really concerning, because when you go out to the marketplace, especially for large clients that have national exposures, the choices are going to be limited,” he said. “When we see these, I think there is more concern than applause or celebration for the most part.”
Mergers of this size often raise concerns about potential price increases for TPA clients, but risk and comp managers should not be overly concerned that they will be put at a pricing disadvantage, according to several experts. If the companies achieve the expected economies of scale, pricing could improve for customers, in addition to providing clients access to better products and services, they say.
“I think there are still options to where the pricing remains competitive, and there are always regional and more specialized offerings in the marketplace,” said Adam Blais, a claims management consultant with Milliman Inc. in the firm’s Boston office. “From a pricing perspective, I’m not too concerned there.”
Officials at several TPAs describe competition in the sector as strong despite the significant consolidation that has occurred in recent years.
“I don’t think it dramatically changes the competitive landscape,” Thomas Warsop, chairman and CEO of York, said of the combination with Sedgwick. “It will remain a robustly competitive environment.”
But the Sedgwick-York deal could trigger additional consolidation in the TPA sector, particularly among the largest TPAs who should be reexamining their own operations to consider how to maintain their competitive advantages, experts say.
“I think we’re going to see more of this type of activity,” Mr. Blais said. “Any time you have two of the top five largest TPAs consolidate, that gets you thinking — how is that changing the competitive landscape and what’s the reaction going to be? I think that we can expect to see different companies — and the larger TPAs in particular — taking a strong look and checking their competitive landscape and doing an analysis of their strengths and weaknesses.”
Smaller or regional TPAs may seek to join forces to create a national competitor or potentially be acquired by larger TPAs looking to gain strategic advantages in certain regions or lines of business, according to some experts. But the smaller TPAs could also use the consolidation trend as an opportunity to market their expertise and differentiate themselves from larger counterparts, Mr. Tierney said.
“For them, the opportunity is, ‘Hey, these TPAs are becoming larger and larger. Do you really feel like you’re getting the attention you need?’” he said. “I think that still resonates with certain clients.”
The TPAs owned by private equity firms have been the most acquisitive in the sector, experts say. Toronto-based private equity firm Onex Corp. acquired York in 2014 for $1.325 billion. Onex will become a shareholder in Sedgwick, as it will take its proceeds in equity and join Sedgwick’s board of directors, Mr. North said.
Private equity firm Carlyle Group became the majority owner of Sedgwick in a transaction valued at about $6.7 billion in 2018.
“Of the largest TPAs, (York was) also private equity owned, so we understood the ownership structure, we understood what would be required to acquire them,” Mr. North said. “There are some very strong and talented competitors that we have that are part of other organizations or part of insurance companies or insurance brokers, and they’re really embedded in those businesses. Sometimes the priorities of those competitors are really driven more by their parent company. Getting them to focus on this space is not as easy as when a company is owned by private equity or independently. That made it easy to have the conversation.”
TPAs owned by brokers, such as Gallagher Bassett Services Inc., the fourth-largest TPA in Business Insurance’s latest rankings, which is owned by Arthur J. Gallagher & Co., or by insurers, such as eighth-largest ESIS Inc., which is owned by Chubb Ltd. and ninth-largest Helmsman Management Services Inc., which is owned by Liberty Mutual Insurance Co., are smaller parts of the total businesses and therefore less acquisitive, experts say.
“Those are the biggest companies that are currently owned by somebody else that could be in the consolidation game down the road,” said Sean O’Neill, a Chicago-based partner in Bain & Co.’s financial services practice.
Helmsman is “committed to helping companies manage claim costs while delivering excellent claimant experiences” and “seeks to grow both organically and through acquisitions,” Dave Dwortz, president and CEO of Helmsman, said in an emailed statement. Chubb declined comment, and Gallagher could not comment prior to deadline.
The TPA market probably does not need 50 or 60 players, but closer to a dozen companies, Mr. O’Neill said. But he added: “This is an industry that will never get that overconsolidated. I think there will always be a few scale players, so choice will exist.”
Broadspire, a division of Crawford & Co., is the second-largest TPA, according to the BI rankings. The company focuses on acquisitions that enhance its ability to serve its customer base more effectively, such as its acquisition of Belgium-based loss adjuster Penta Expertise & Consult NV, said Mike Hoberman, Broadspire’s chief client officer based in Berkeley Heights, New Jersey.
“We stay focused on the customer,” he said. “We’re open to making acquisitions provided that that deal adds value. The focus is not volume.”
Integrating two giants
A merger of this size comes with inherent challenges such as the merging of cultures and employee populations, experts say.
“One thing Sedgwick has going for it is that it’s not their first rodeo,” said Mr. Stack of Amaxx.
The York deal follows Sedgwick’s April 2018 acquisition of London-based loss adjuster and claims management firm Cunningham Lindsey Group Ltd.
“They basically overnight became an international TPA,” Ms. Truman said. “They bought two very large companies in a short period of time. We’ll be watching how they integrate that.”
Maintaining and bolstering employee and customer relationships throughout such an integration is critical, particularly in a TPA industry primarily driven by relationships, experts say.
“I think there will be attempts to recruit accounts from Sedgwick or York, or talent from them,” Mr. Shields said.
Although there are redundancies in any merger, Sedgwick hired more than 3,000 people last year and is not looking to lay off employees or shut down offices, Mr. North said.
“Both York and Sedgwick are constantly on the hunt for great talent,” Mr. Warsop said. “That’s something I’m not losing any sleep over — helping our people understand why this is an opportunity. Almost everyone is seeing it that way.”