Executives from the troubled Barrett Business Services (Nasdaq: BBSI) have been making the rounds to shore up its California business in light of its recent $80 million workers’ comp reserve charge and lingering questions about its liquidity. They’ve also circulated e-mails, letters and fact sheets challenging the reporting on its financial difficulties. Workers’ Comp Executive has reviewed some of these claims and found the veracity slightly lacking.
The BBSI marketing materials provide factual points but also sometimes gloss over the additional information that modifies those points so that they lead to a conclusion that might not be complete.
Workers’ Comp Executive addresses some key issues of concern to brokers and their employer clients – especially those employers that obtained workers’ comp coverage under Barrett’s self-insured certificate. Under the terms of SB 863, Barrett will have to surrender its certificate to self-insure at the end of the year and is in the process of transferring all of its California clients to coverage fronted by Ace Insurance Company. Barrett will retain liability for the first $5 million under that policy.
Claim: BBSI has “Gross Revenues of $3.2Billion”
WCE: Both True and Kind of False,
The company includes in its gross sales, as do other companies of this type, all of the payroll, and taxes which are simply pass though amounts to client employee or taxing organizations. This is the overwhelming bulk of this figure. One should also subtract costs of workers compensation.
Claim: “BBSI is not, a Self-Insured Group. There is no Joint and Several Liability obligation. BBSI has a guarantee cost program: there is no danger of assessments to our clients.”
WCE: Partially True Partially False
Barrett is not a self-insured group (SIG) and is not covered by the joint and several liability obligations that SIGs operate under. Additionally, employer clients who have only been covered by Barrett’s fronted insurance policy from Ace should have no additional liability for workers compensation claims.
But that is not necessarily true for employers who were covered under the self-insured program. Employer clients that were covered under Barrett’s certificate to self-insure could face liabilities in the event of a default. The Self Insurers’ Security Fund (SISF) has and is pursuing lawsuits against the clients of a formerly self-insured PEO (Mainstay) to recover unfunded liabilities. SISF is asserting that it has the right to recover these funds under Labor Code section 3744. Here is that section, be sure to see the last clause:
“The fund shall have the right and obligation to obtain reimbursement from an insolvent self-insurer up to the amount of the self-insurer’s workers’ compensation obligations paid and assumed by the fund, including reasonable administrative and legal costs. This right includes, but is not limited to, a right to claim for wages and other necessities of life advanced to claimants as subrogee of the claimants in any action to collect against the self-insured as debtor. For purposes of this section, “insolvent self-insurer” includes the entity to which the certificate of consent to self-insure was issued, any guarantor of the entity’s liabilities under the certificate, any member of a self-insurance group to which the certificate was issued, and any employer who obtained employees from a self-insured employer under subdivision (d) of Section 3602.”
We learn below that a significant portion of BBSI’s “reserves” are unfunded and it is the unfunded portion that could get employer clients sued.
Claim: “BBSI’s cash, cash equivalents, marketable securities, and restricted securities totaled $167.5 million and no outstanding borrowings on our revolving credit facility.”
WCE: Partially True
Barrett is failing to disclose that at least 39% of these funds are restricted according to Barrett’s third-quarter 2014 report to the Securities and Exchange Commission. WCE can’t determine at this time whether or not – or how much – of the rest of the balance may be restricted. It is known that assets have been committed, in accord with standard practices, either in general or in the specific, to the security bond insurer who posted in its behalf the $104.7M to the State of California Office of Self Insured Plans.
BBSI reports $51,985,000 in cash and cash equivalents; $34,760,000 in marketable variable rate demand notes and corporate bonds; and $15,984,000 in marketable long-term municipal and corporate bonds for a total of $102,729,000 in unrestricted cash, cash equivalents and marketable securities. Barrett reports that another $20,943,000 in restricted certificates of deposit and $43,821,000 in restricted marketable securities and workers’ compensation deposits, including the deposits it has put up to secure its fronting relationship with ACE.
Barrett reports that “During the first quarter of 2014, the Company made an initial deposit of $20.0 million into a trust account established between the Company and ACE related to the new ACE fronted insurance program. The Company began making monthly payments in April 2014 into the trust account to be set aside for the payment of future claims. The balance in the trust account as of September 30, 2014 totaled $31.1 million. The $31.1 million is included in the $43.8 million of restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheet.”
Barrett is also being truthful in the claim to brokers and employers that it has no outstanding borrowing on its $16.5 million revolving credit facility with Wells Fargo, but it fails to note three critical points that substantially change the meaning of that statement: First, that its access to this facility is restricted; secondly, that there was a violation of the loan’s covenants, now temporally waived; and third, that it has until December 31st to have its unfunded reserves dealt with in a way acceptable to the bank.
As Workers’ Comp Executive has previously reported, Barrett discloses that Wells Fargo placed limits on its borrowing as a result of the increase in its reported workers’ comp liabilities. As it admits in its SEC filing, “As a result of the increase in the Company’s workers’ compensation liabilities as of September 30, 2014, to a total of approximately $208.3 million, and the related workers’ compensation claims expense accrual of $101.2 million for the quarter ended September 30, 2014, the Company was in violation of the above financial covenants at September 30, 2014, other than the prohibition on incurring additional indebtedness. On November 10, 2014, the Company reached an agreement with the Bank pursuant to which the Bank has agreed to waive the covenant violations in exchange for payment of a waiver fee of $20,000 and a requirement that the Company present a plan acceptable to the Bank by December 31, 2014, addressing the Company’s workers’ compensation reserve funding requirements. Until the reserve funding plan has been accepted by the Bank, the Company may not make any repurchases of its outstanding common stock or draw on the revolving credit facility to fund its insurance reserves (emphasis added).”
We note that the record shows that certain officers have been buying stock.
Claim: “BBSI has a surety bond with the State of California to cover all liability for the Self-Insured years.”
WCE: Not True
As we see in the previous section BBSI’s SEC filing shows that it had unfunded reserves in the amount of $80M. Prior to that disclosures Barrett reported that is has bonds valued at $104.7 million filed with the state of California to cover its self insured workers’ comp obligations. In order to post the $104.7M, BBSI put up $20.9M as collateral to the surety bond company. The $84 million difference is the risk of the bond insurer. This is a different $80M than the underfunded claims liabilities, and the company is on the hook for this too should there be a default.
However, BBSI fails to disclose that the value of that security bond was set before it announced that its workers’ comp reserves were short some $80 million.
When Barrett’s California bond obligation was increased from $63.9 million to $104.7 million in early 2014 Barrett was estimating the value of its workers’ comp obligations at $112.4 million. Since that time it has raised its estimate of workers’ comp reserve liabilities to $208.3 million and it has not reported any increase in its California bond.
Barrett concedes the need for additional security in another statement saying, “BBSI is working with OSIP to ensure our liability for our Self-Insured years is met.” If its California obligations are fully covered, logic dictates, then there would be no work to do.
It has stated publically that it is trying to borrow funds to fund its reserves and that it may not be successful. The Office of Self Insurance Plans tells Workers’ Comp Executive that, while it cannot discuss individual plans specifically, that it would be within its normal course of action to require increased deposits in situations where reserves deteriorate quickly.
Claim: “BBSI funds a trust with Ace for all liability associated with Ace policies.”
WCE: True.
Barrett reports in its third quarter 2014 filing that “During the first quarter of 2014, the Company made an initial deposit of $20.0 million into a trust account established between the Company and ACE related to the new ACE fronted insurance program. The Company began making monthly payments in April 2014 into the trust account to be set aside for the payment of future claims. The balance in the trust account as of September 30, 2014 totaled $31.1 million. The $31.1 million is included in the $43.8 million of restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheet.”
What isn’t known, in light of previous disclosures, is the credibility of the current reserves, or if ACE has agreed to renew its fronting arrangement or reinsurance agreements. Or what the amount of any increase will be if indeed there will be an increase.
Workers’ Comp Executive is working to learn and in turn inform readers about the continually developing situation with BBSI. We are approaching this from as many angles as our staff size permits. If you have an interest you’d like us to examine, or some facts you’d like us to look into – or for that matter some facts to bring us – please let us know. There are more stories we are working on.
Filed by Brad Cain in San Francisco and Dale Debber in Sacramento.