Monday, March 25, 2013

The Ullico Lesson: Cash is King

I have to admit, I didn't learn much in business school. There was lots of theoretical instruction, but in truth the practical application, at least in my experience, was limited until I went out in the real world as an entrepreneur - then certain lessons would miraculously come to life.

But there was one lesson that had always struck a chord, that was so basically simple that it could not be misconstrued, forgotten or misapplied and I "got it" immediately without the need for real world practical application.

My basic finance professor, Mr. Dainese, would in every single class always go back to his one simple rule of business: cash is king.

The lessons in his simple statement were relentless with many case examples of high falootin' big time business people losing everything because they couldn't pay the bills. Lots of assets that weren't readily liquidable meant that when times got tough creditors got tougher.

Cash is king - those three words have provided me with a lot of guidance through the years in business.

The executives at Ullico Casualty Co. would have done well to heed that advice too.

As reported by WorkCompCentral on Friday, the Delaware Insurance Commissioner's office obtained a rehabilitation order and injunction from the Delaware Chancery Court to take control of Ullico Casualty on March 11.

At that time the company's claims department was $52 million in the hole. It also had racked up $380 million in liabilities against assets of roughly $327 million.

Workers' compensation insurance makes up roughly 81% of Ullico Casualty's premium volume. While it is unknown how much of that volume was comprised of professional employer organizations (PEOs), that line of business is apparently what put the tourniquet on the company's cash flow.

According to one company it is estimated that in the last two years, Ullico Casualty was embroiled in more than 60 lawsuits, many of them against PEOs, "in an effort to extract funds…to improve its deteriorating finances."

Ullico apparently had a big appetite for risk.

The big problem was that many of these PEO policies were large deductible contracts with deductibles as high as $1 million. Because insurers are required to pay first-dollar coverage on claims, they rely on policyholders to reimburse them for losses up to the deductible amounts.

The problems with the PEO industry over the last couple of years are legendary and have filled up many pages of news reports in the work comp industry and even in this blog.

When Ullico went out and sued everybody to shore up its finances, it sent a bad message to its policyholders - that the company was in trouble. Consequently the policyholders withheld even more, not wanting to throw good money at bad money.

Christopher Wadsworth, a Florida attorney who represents a PEO that Ullico Casualty is suing, told WorkCompCentral's David Dankwa, "They already had a lot of our money held in escrow and we were afraid they would go into receivership and we would lose the money they were actually holding in escrow. We knew they were in financial straits and we did not want to give them more money."

In the meantime Ullico's cash problems highlight a concern that had been expressed by the Florida Workers' Compensation Insurance Guaranty Association - that if there's going to be large-deductible policies there also needs to be sufficient collateral to execute against in the event of a failure.

It doesn't get any more basic than that. Forget all the fancy financial tricks and sophisticated schemes with fanciful names. If you can't pay the bills you're out of business.

Cash IS king.

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