Flash Report: BBSI Admits 62% Under Reserving Thru 2012

By: Brad Cain

Updated: Corrected text in brackets

Barrett Business Solutions (Nasdaq: BBSI) (BBSI) says it is taking an $80 million charge to boost reserves for its self-insured workers’ compensation program. [The charge covers workers’ compensation claims for 2012 and earlier. The charge includes $61.3 million for workers’ compensation claims from prior accident years.] BBSI does not have the cash resources on hand to cover the increase. It reports cash and cash equivalents on hand of approximately $52 Million as of September 30th.

The company says the $80 million charge represents approximately 38% of its self-insured outstanding workers’ comp liabilities, which are now estimated at the increased level of $208.3 million. The charge represents a 62% increase over its prior reserving level.

There’s more: Barrett says that it intends to finance some of the reserve increase with debt. However, it is talking with its bankers to boost its borrowing capacity to meet its liquidity needs.

“In order to fund the charge, we anticipate using a combination of cash on hand and debt financing,” says Jim Miller, Barrett’s chief financial officer, during a conference call with investors. “Our existing credit facility with our principle bank provides current borrowing capacity of up to $14 million. We’ve entered into discussions with the bank to increase the borrowing capacity and meet the liquidity needs of the company.”

Reserve charges of this magnitude raise concerns about the ultimate solvency of the program. It is not known if or when California’s Department of Industrial Relations’ Office of Self Insurance Plans (OSIP) has sought or is seeking additional cash to cover Barrett’s security deposit.

OSIP says it continuously and closely monitors financial events, reports and other risk factors for California’s self-insured employers. However, OSIP is legally barred from commenting regarding specific posting requirements for individual private self-insured’s.

In the case insolvency occurs, employers that did business with Barrett, pre 2012, could find themselves on the hook for unpaid losses. The Self Insurers’ Security Fund is pursuing litigation against Mainstay Business Solutions and its former employer clients following the failure of that PEO.

The $80 million reserve charge is not limited to Barrett’s California claims, but does covers years that it was self-insured for workers’ comp purposes in California. SB 863 required the OSIP to suspend the self insurance certificate for PEOs as of 2015.

The company is in the process of transitioning its California clients to workers’ comp policies fronted by Ace Insurance that has Barrett retaining the first $5 million in liabilities on a per claim basis. Barrett officials say they expect to have all of their California clients covered by the new policies by later this month. Under the new fronting arrangement, it is thought that employers will be covered by ACE, down to the employers’ retention, in the event of a BBSI insolvency. But this only includes the time the employers were covered by the fronting policy and does not pick up past years.

Workers’ Comp Executive has not obtained a copy of the fronting agreement.

The reserve charge and subsequent quarterly loss prompted a sell-off in Barrett stock that has generated an investor lawsuit. The Seattle-based investor rights law firm of Hagens Berman Sobol Shapiro LLP filed the lawsuit. The complaint alleges that the company failed to disclose that it under accrued its self-insured workers’ comp reserves, among other claims. The hit to reserves, they say, erased 5 years of profits.