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February 22, 2010 07:06 PM UTC

Pinnacol seeks a "quicky divorce" from the State

  • 20 Comments
  • by: allyncooper

(Good questions. What are the implications if the “divorce” is granted? – promoted by Middle of the Road)

POLS UPDATE: No stinking deal, says Senate President Brandon Shaffer to The Spot:

“The Pinnacol transaction is not something we’re seriously looking at this year,” Shaffer, D-Longmont, told reporters. “I think it’s a bad deal on a variety of different levels, and I’m not willing to go forward with it.”

Any deal to give the state-chartered worker’s compensation insurance fund autonomy would have to be approved by lawmakers, and would require either Shaffer or House Speaker Terrance Carroll, D-Denver, to allow a legislator to file a late-status bill. Shaffer said he would not allow a late bill in his chamber for that purpose…

Pinnacol’s proposal called for paying the state $75 million in the current budgetl year that ends in June, $75 million next year and $50 million over 30 years. Senate Democrats had already ripped the proposal as ridiculously low, pointing to the fact that Pinnacol’s assets had been as high as $2 billion in recent years.

House Speaker Terrance Carroll was a little more equivocal, but this “offer” by Pinnacol to privatize itself on its own terms, in exchange for a small fraction of what legislators were prepared to take last year sans concessions honestly could be considered an insult. Original post follows.

—

Pinnacol Assurance, the statutorily created workers compensation insurer which has 57% of the market, is seeking a “separation” from the State of Colorado.

Pinnacol is proposing that the current enabling statute be amended to include the following:

1. Pinnacol will no longer be a political subdivision of the State but will operate as an independent domestic mutual insurance company.

2. Pinnacol will still underwrite the residual market and thus retain its Federal tax exemption.

3. Pinnacol will pay an annual premium tax of 1% outside of the residual market (what other insurers currently pay)

4. Pinnacol has offered a  ” $200 million buyout to the State”  

5. Pinnacol wants the deal done on or before June 30, 2010 – hence the “quicky divorce”.

Obviously the Pinnacol separation proposal is a counter to the current proposed bills in the Legislature that were the result of the Pinnacol Interim Committee hearings held last summer chaired by Senator Morgan Carroll, D-Aurora. That committee was legislatively mandated after the aborted attempt to appropriate $500 million of surplus Pinnacol funds last session to help with the budget crisis.  

The Interim Committee examined the operations of Pinnacol in comparison to other states, and also heard extensive testimony about problems at Pinnacol involving denied claims by injured workers (including bonuses for Pinnacol claims adjusters denying claims), and wrongful denial of medical care and substandard care.

At the same time, the Committee found excessive and non-compliant CEO and upper management compensation packages per industry criteria and questionable and extravagant expenses for top management.

Another issue examined by the Committee was the excessive and intrusive surveillance of injured workers, Pinnacol spending $ 4.7 million to spy on thousands of injured workers but only 10 out of 50,000 + claims actually convicted of fraud for a cost of $ 470,000 per conviction.

The bills coming out of the Committee and in the Legislature for consideration do not fundamentally change the statutory relationship between Pinnacol and the State, but rather address the above issues of accountability, openess, and fairness to injured workers. A key point in the Pinnacol separation proposal is that none of the proposed Interim Committee bills be passed by the Legislature, thus negating the work of the Committee intending to address the issues of injured workers who are denied claims, are denied adequete medical care, and the other “heavy handed” practices of Pinnacol in the way it sometimes treats claimants.

Although the headlines are touting a “$200 million payout” to the state (certainly enticing given the current budget crisis), the details as proposed by Pinnacol call for payments over a period of time to be determined, and $ 50 million to be in the form of a surplus note to the State over a period of 30 years. By surplus, Pinnacol states that the payment of such note is subordinate to the other claims of conventional creditors. In other words, the State is last in line to collect its money.

It will be interesting to see where this goes. Ken Ross, CEO of Pinnacol, made a similar proposal last year on the eve of the Interim Committee hearings ( reported by me on Pols 7/30/09 “Pinnacol feeling the heat?”). However Senator Carroll, the chair of the Interim Committee, claims that Mr. Ross never made any such proposal to her or the Legislature, apparantly Mr. Ross played it through the press at a meeting with the Denver Post’s editorial board.  

Given the current fiscal crisis of the State, the Pinnacol separation proposal may sound appealing to many. But the Legislature should be cautioned to look at this critically, as to the financial ramifications of the “separation” (is it really a good deal for the State?), and more importantly, will the rights and reforms necessary to protect injured workers be abrogated ?

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20 thoughts on “Pinnacol seeks a “quicky divorce” from the State”

  2. One “word”: FNMA.  Worked well while a government body, got us into the mess it’s in because it went virtually private.

    The question to ask is, “So why is this good for the people of Colorado?”  The answer is obvious, it’s not.  Why do we need another private insurer? There’s a reason Pinnacol was created.

    The Pinnacol top brass sees the company as a toy to be used as they wish and to enrich themselves.  Count on it.

    Then, when the house of cards crashes, who will bail them out? Yup.  (See: FNMA)  Count on it.  

    1. FNMA did work well as a governement agency.

      And it worked really well as a privately owned entity (albeit with special status) for the first 20 years or so.

      But then FNMA fell victim to the same compensation pressures as the street- stock price targets triggering HUGE bonuses for the CEO and management. This led to creative accounting and short term decisions based on those stock goals and bonuses, but ignoring or misprioritizing long term goals.

    1. Pinnacol claims the $200 million is a “meaningful portion” of the value of Pinnacol.

      Based on comparable public market multiples as of February 5, 2010, and without reduction for the above described payments to the State, management believes that the comparable Pinnacol market multiples would likely range from $375,000,000 to $815,000,000, calculated on a price to book basis, and if calculated on a price-to-earnings basis, from $304,000,000 to $463,000,000. These multiples infer that the proposed payments to the State would represent a meaningful portion of the value of Pinnacol.

      Source: Pinnacol Assurance Separation Presentation to the State of Colorado, Feb. 11, 2010, p. 27.

      That’s Pinnacol’s methodology of coming up with $200 million. I’m sure the Legislature will have its own analysis done.  

      1. Why am I not surprised? Thieves tend to congregate when they think they can profit by “team larceny”. Maybe I am just naive and ignorant of the “complexities” of big business, but this sounds like some movers and shakers are starting to worry about their futures.

        I would venture that the majority of Pinnacols’ employees are fine hardworking people who just do their jobs, but being an employer (after many years as an employee) did not improve my opinion of Pinnacol. My practical experience tells me the managements’ adversarial attitude towards workers pointed out by the Committee are accurate. The association with Goldman Sachs certainly makes it easy to believe the bosses at Pinnacol are of the “smartest guys in the room” variety.

        It is long past time for the State to clean house over at Pinnacol.  

      2. If the State was interested in collecting $500m in surplus from Pinnacol last year, I can only assume that G-S’s numbers represent some kind of yearly profit and not the overall book value of the company.  Or, alternately, the value of the company net some worst-case loss scenario…

  4. Pinnacol can just give all that tax-free money that they have, and then start rebuilding their coffers while paying taxes at the same time. Sounds fair to me. Fiscal crisis solved.

    1. Let’s face it – if the State last year thought they could “appropriate” $500 million from Pinnacol’s surplus, then that has to be the absolute floor for price negotiations.

      You have to leave something for an insurance base – assuming you still really want a workman’s comp insurer that has some assets to cover the insurance.  But why in the world would the state want to do this, except for the lure of cash?  The point of having a public insurance fund is to have some control over the quality of that insurer.

  5. The Interim Committee examined the operations of Pinnacol in comparison to other states, and also heard extensive testimony about problems at Pinnacol involving denied claims by injured workers (including bonuses for Pinnacol claims adjusters denying claims), and wrongful denial of medical care and substandard care.

    They got caught and there is probably a lot of dirt to dig on these guys. They don’t want to be investigated anymore.

    For this insight, you are all welcome 😉

      2. Mr. Ross and his management team don’t want the scrutiny for sure. And politics is timing right? Pinnacol knows the state is broke so they are in a position to buy out cheap.

        A little noticed provision in the Pinnacol Separation proposal is that the current requirement for Pinnacol to only offer worker comp insurance is dropped – Pinnacol would be free to get into other insurance markets – life insurance, health, etc. Nothing like using other peoples money to start your new businesses with.

        Ken Ross is straight out of New York – and he knows who Robert Moses is and how he acquired his power. Enuf said.

         

  6. Besides the fact that this “offer” is asking the state to take $0.10 on the $1.00 by offer $200 Million for a $2 Billion asset…

    Losing oversight for injured workers and making no rate protection provisions for employers…

    It is absolutely stunning to make an explicit offer of $200 million for the defeat of legislation.   Offering cash for passage or defeat of legislation is not kosher, to say the least.

    1. But the $150 million over three years, and then $50 million paid out over 30 years? I don’t think so. The sheer magnitude of their arrogance numbs the mind.

  7. It was reported in the Denver Business Journal last Friday that Sen. Pat Steadman, D-Denver, would be introducing the legislation. I did wonder at the time about filing a late status bill on something this contentious and complex, and indeed Sen. Shaffer says he won’t allow it.

    It was Sen. Schaffer who last year came up with the idea for “appropriating” the $500 million from Pinnacol, so no love lost there.

    So the proposal remains a rather transparent ploy to deflect consideration of the Interim Committee bills, or as Sen. Carroll put it more directly, offering cash to kill the reform bills.

    With the buyout issue apparently moot, the emphasis should be on passing the Interim Committee bills. Bills are as follows:

    SB 10-11 Conflicts of Interest in Pinnacol

    SB 10-12 Enforcement/Updates penalties

    SB 10-13 WC Transparancy and Accountability

    HB 10-1009 Pinnacol Board Transparency

    HB 10-1012 Survellance Standards

    HB 10-1038 Brochure of Rights

    More information and status of the bills can be found on the GA website.  

    1. As stated above, the Denver Business Journal in an article bylined by Bob Mook stated Sen. Pat Steadman would be introducing the Pinnacol “separation” bill.

      Because that didn’t sound right to me, I checked with a reliable source and they told me Sen. Steadman never agreed to sponsorship of the Pinnacol bill – that in fact Pinnacol never even talked to him about it. My source tells me that Pinnacol’s lobbyist gave that information to Bob Mook of the DBJ and he went with it.

      Looks like Pinnacol has a “credibility gap”. But that’s nothing new.  

    2. Don’t believe everything you read in the Denver Business Journal.  Allyncooper’s “reliable source” is far more accurate than the story in the DBJ that a reporter who never spoke to me chose to print, presumably based on unreliable sources.

      Senate President Brandon Shaffer asked me to represent our caucus during the discussions surrounding Pinnacol’s “separation” proposal.  Those discussions have barely begun and where they may lead is quite unclear.  Morgan Stanley is currently evaluating the offer, and most people in the Capitol are also busily picking it apart.  

      Ultimately it is the responsibility of each legislator to decide which bills to sponsor or support.  I’ve made a couple of rookie mistakes this year about co-sponsoring some questionable bills (SB 107 is great case in point), but I’m not about to put my name on any bill granting Pinnacol a “separation” unless and until I’m satisfied that we’ve reached an agreement that is fair and balanced for all the interests at stake.  We’ve got a long way to go if we’re ever to get to that point on this one…

      1. It’s nice to get an answer from the source – thank you. As to the DBJ, I find Pols much more reliable – there’s mistakes aplenty here but they get corrected fast.

        Question for you – have you guys considered bringing in new management to Pinnacol? Even if there is a separation, wouldn’t it be better for it to have a set of managers who do not view it as their own private money pit?

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