The overall number of merger and acquisition (M&A) deals in the U.S. in the 12 months ending December 31, 2021, was more than 21,000, according to Statista Research. The value of these deals amounted to about $212 billion. There are many factors involved in the due-diligence process of M&A. One item that shouldn’t be overlooked is the impact on Workers’ Compensation for the entities involved in a merger or acquisition, including if combinability is possible and its effect on the experience modification factor (X-mod).
When a merger or acquisition occurs, and there are changes in ownership status, employers in states that use the National Council of Compensation Insurance (NCCI) for insurance rating and data collection on Workers’ Compensation must report the changes to their carriers within 90 days by completing the ERM-14 Form. An ownership change may affect whether the new entity can cover its employees under one Workers’ Compensation policy. Over one entity may be insured on a policy. However, this only occurs when the entities share the majority common ownership. Separate policies are required for entities that do not share majority common ownership.
Combinability Guidelines
As set forth by the NCCI, the combination of two entities requires the following:
- One person, usually the same, or a number of persons or a corporation has over 50% of each entity (note this does not mean 51%, it could be 50.1%)
- An institution maintains a majority interest in another establishment, securing ownership over another operation. All entities are combinable for experience rating purposes regardless of the number of entities involved.
Determining majority ownership interest occurs based on certain things, such as:
- Most of the issued voting stock
- Most of the owners, partners, or members, if no voting stock have been issued.
- Most of the board of directors or comparable governing body if a. or b. is otherwise not applicable.
- Participation of each general partner in the profits of a partnership. Therefore, limited partners do not receive consideration when determining a majority interest.
- A fiduciary must hold ownership; such an operation’s complete ownership interest may possibly include any ownership held in a nonfiduciary capacity.
If combinability is possible according to the guidelines, each entity’s payroll, loss history, class averages, loss limits (medical-only versus medical plus indemnity), and formulary factors applied by the NCCI (or the applicable rating bureau) will be combined to calculate a new experience modification factor. There should be no surprises if both entities have similar safety and risk management approaches and good loss history.
However, if one of the entities has good loss history while the other doesn’t, there could be a significant impact on Workers’ Comp rates. This will depend on the size of each entity merging and other factors. For example, a larger entity purchasing a smaller firm might not see much of a change. In contrast, two similar-sized companies with vastly different loss experiences will see significant rate changes. If one of the companies has a high incidence of workplace injuries, preventative measures can be implemented when integrating the other company’s workforce to improve safety and mitigate losses moving forward.
In addition, those considering a merger or acquisition should discuss this with their insurance agent, who can run a test calculation to estimate the new X-mod.
About Prescient National
Prescient National provides companies with Workers’ Compensation insurance solutions. In addition, we help clients look at the impact safety can have on their organization, including the potential savings they will experience. This begins with assisting clients in implementing strong hiring practices, understanding job requirements, and bringing on employees who are fit for duty using a post-offer medical questionnaire (POMQ).
We utilize data-driven analysis, including the adjuster’s investigation, to determine where improvements can be made to mitigate a similar loss or improve the outcome of a claim. Our goal is to provide critical information that can be used as a teaching tool for the employer to make changes that will improve safety and productivity in the organization.
