Barrett Business Services (NYSE: BBSI) was forced to post significant additional reserves last fall for its workers’ comp program. A subsequent scramble to find the financing to cover the reserves and other related expenses found it in debt to cover its reserves. Now, however, Barrett Business Services (NYSE: BBSI) is reporting headway in running off its older self-insured claims. The professional employer organization (PEO) says that roughly half of the older claims that had to be strengthened have now been closed.
“To date this brings the closure of 650 claims or approximately 50% of the total strengthened claims from 2012 and prior yielding $7.8 million in total credits,” James Miller, Barrett’s chief financial officer, said during a conference call announcing the company’s second-quarter results. “Specifically, we are seeing a continued trend of claims from the years 2012 and prior closing for less than the amount put up on these specific claims.”
Barrett announced last year that it was taking an $80 million charge to strengthen its workers’ comp claims, which amounted to an almost unimaginable 62% increase in its reserves. The claims stemmed from the period when it operated as a self-insured employer with most of the exposure to its California clients. Since 2014 Barrett has been using a fronted workers’ comp program through Ace whereby it retains the first $5 million per claim.
Miller reports that during the second quarter Barrett deposited another $31.4 million into the trust account that Ace is holding to cover Barrett’s portion of the claims. This builds on the $28 million it deposited in the first quarter of the year and the $50.1 million it had on deposit at the end of 2014. “The balance in the Ace trust account is expected to build for the foreseeable future as growth into the program continues,” says Miller, noting that the funding for the deposits will come from the expense it accrues from its workers’ comp line item.
Miller says its workers’ comp expense amounted to 4.9% of the company’s gross revenues in the quarter, which works out to $47.7 million. This is up from the 4.4% expense rate it had in the year ago period, which was only the second quarter under the Ace program and several months prior to the announced reserve charge. Going forward, Miller projects that its workers’ comp expense will be in the 4.8% to 5% range for the rest of the year.
Deposit Requirement Reduced
Barrett’s efforts to close out its legacy claims from the period when it was self-insured are generating returns. Beyond the $7.8 million in credits generated directly on the case reserves, the lower claim count and exposure is also bringing down its required security deposits.
The Office of Self Insurance Plans recently reduced BBSI’s security requirement resulteding in some $26 million previously restricted certificates of deposit being reclassified as a current asset. Last year Department of Industrial Relations’ Office of Self Insurance Plans increased its security deposit demand by nearly $86 million in the wake of the reserve charge.
Barrett operated in California for almost 20 years as a self-insured employer for workers’ compensation purposes. But the SB 863 workers’ comp reforms banned PEOs and temporary staffing firms from self-insuring after Jan. 1, 2015.
PEO Growth
For the quarter, Barrett reported continued growth in its co-employment PEO product that represents the vast majority of its business. Overall, Barrett says it had $971.9 million in gross revenues during the quarter, and $929.5 million came from its PEO operations. Gross revenues include the various payroll and payroll taxes that its employer clients paid and that pass through the company. The totals represent a 22% increase in gross revenues over the year ago period.
Barrett President Michael Elich says the growth in revenue comes as the company continues to add new PEO clients. BBSI for the quarter added 261 new PEO customers and lost 60 clients, he says.
The company’s overall financial result was net income of $8.7 million for the quarter – a 20% increase over the $7.3 million it reported in the second quarter of 2014.