Healthcare & Insurance BPO Insight

While Crawford's Q3 results are solid and management has upgraded its end of year guidance, there are some areas of concern.

Most of the growth in the Americas region has some from the U.S. with increased claims volumes following Hurricane Irene. Claims volumes in Canada were flat and fell in Latin America. Continued expansion of the global technical services (GTS) and Contractor Connection (property repair services) remains an important focus although revenue contribution still remains minimal.

All the key regions within EMEA/AP returned revenue growth. AP returned around 50% y-o-y revenue growth on the back of the Japanese earthquake. Revenue in the U.K. grew by ~10% through new client acquisitions but claims referrals were down which may impact revenue in Q4. The CEMEA region is a key growth focus particularly within the TPA sector and saw ~15% y-o-y revenue growth to ~$24m.

Broadspire remains a key focus with revenues down by 5% and the operating loss increasing significantly. Management points to improvements in claim volumes in Q3 (NH estimate this at ~6%), new client acquisitions and further cost management initiatives being undertaken. However, management has made similar points during the last two earnings calls and while stabilizing Broadspire's revenues is the key priority, it is not clear that the current actions are having any significant effect. Achieving the previously stated goal of rectifying the problems at Broadspire by the end of 2011 will be a significant challenge.

Solera has increased investment in new product and market development by 25% yoy to over $19m in Q1. Approximately 65% has gone towards new product development and the remainder in building presence in new marketing such as China, Italy and Chile.

Solera saw a slight increase in Q1 claims volumes in Europe year-over-year. Despite the economic situation is some European countries, Solera has grown in Portugal, Greece and Italy with revenues up 13%, 24% and 160% year-over-year respectively. Solera has also returned positive growth in France, Germany, Belgium, Poland, Russia, Brazil and Mexico

However, challenged regions for Solera are the U.K., Spain, the Netherlands, Austria and Switzerland. Caution over growth prospects in these challenged regions has led to the downgrading of revenue guidance.

Solera was also increased revenues per claim by 7.3% yoy through expansion into higher value services and improved software platforms. This is the third consecutive quarter in which revenue per claim has increased.

Under the leadership of its new CEO, Ken Lever, Xchanging has moved fast during H1 2011 and made some significant moves to restore growth and profitability including a strategic value review of all loss making units, removal of 127 management roles, property rationalization and increased levels of offshoring.

This latest step marks the end of Xchanging's foray into the U.S. insurance sector and the completion of a significant phase of Xchanging's turnaround. The remaining focus areas of the turnaround plan are:

• Stabilize Kedrios, the Italian securities processing and fund management unit
• Improving the profitability of the German funds administration business
• Developing vertical capabilities in property, education, transport and healthcare
• Grow the technology business particularly in insurance software and network management.

This is a strong set of results from EXL with the outsourcing group returning over 27% growth even when $8.3m of contribution from the OPI and PDMA acquisitions and $1.1m of favourable exchange impact are discounted. The insurance unit in particular has seen very strong growth, a combination of revenues from new clients secured in Q1 and increasing transaction volumes.

The transformation unit has also seen significant growth, although most of this is from existing clients with less than $1m from new clients during the quarter. EXL has been building analytics and process capability in this group, doubling the number of FTEs over the last 18 months. The focus is now going to be on building the transformation sales pipeline.

The high attrition rate that has been a key priority for EXL management since Q1 2010 appears to be improving slowly despite a small sequential uptick.

This is a very strong set of interim figures from The Innovation Group (TIG) and results of the re-structuring undertaken in 2010 have delivered strong revenue and profitability growth.

TIG has secured some significant new BPO wins during H1. In the U.K., TIG will provide outsourced maintenance, repair and servicing for Tesco's online vehicle sales offering and accident management services for Ford U.K. In South Africa, TIG has entered the property BPO sector by securing contracts for installation administration and maintenance services for solar powered water heaters.

TIG acquired the German franchised windscreen repair organization, Wintec for £3.9m in December 2010 and TJH Administration, a South African underwriting, policy and claims administrator in January 2011 for £1.0m. Both these complement TIG's service offering in core regional markets. Total revenue contribution from these acquisitions was ~£0.7m during H1.

The software division has seen revenue growth in excess of 20% since the launch of its Insurer Claims platform in January 2011. It has also signed a contract valued at £3.8m over the next 18 months with an unnamed tier-1 US insurer for both Insurer Claims and the Insurers Analytics v7.0 software (due for release later in the year). TIG claim the sales pipeline for the Insurer platform is strong, particularly in the U.S. and Australia, but warn that sales cycles continue to be extended and do not expect significant revenue contribution to be visible until 2012.

Enterprise, the implementation of the Insurer v7.0 into TIG's BPO business internally was completed in France and Spain at the end of 2010 and the cost benefits are now being seen with estimated savings of £4m. The Enterprise project continues in Germany, Australia and U.K. with completion expected by the end of the fiscal year.

While the overall results from Crawford show growth both in revenue and profitability, at a divisional level it is a very mixed story.

The international unit continues to be the key driver of revenue growth with all regions except Latin America returning positive growth. The Canadian operations(~30% of International revenues) that saw declining revenues in H1 2010, appear to have resolved its issues by undertaking a cost reduction program, renewing contracts with the two largest clients and also an improvement in claims volumes in Q4. The U.K. and Australia regions both returned revenue growth in excess of 10% during Q4.

The U.S P&C unit saw a decline in claims volumes in Q4 due to benign weather conditions (down to 92,800 in Q4 from 108,300 in Q3). Key objectives for the US P&C unit during 2011 are:

• Continued expansion of the technical services offering and data analytics
• Continued growth of the Contractor Connection and vehicle services networks
• Increased focus on the more specialist offerings around commercial transportation, consulting services and litigation

The Broadspire unit continues to be affected by the subdued volumes in worker compensation and medical management claims as the 'jobless recovery' continues in the U.S. Claims volumes have begun to increase, up to 60,800 in Q4 from the low of 51,400 in Q2 of 2010. However, management expect further cost reductions will be necessary during H1 2011.

Securing the management of the Gulf Coast Claims Facility (GCCF) to administer claims following the BP oil spill has been the key growth driver for the Legal Settlement Administration unit during 2010. This contract's momentum is expected to drive further growth for at least the first half of 2011 with the project backlog standing at a record $90m. However, Crawford's management is looking beyond the GCCF by increasing focus on market share gain in the class action sector.

WNS continues to face challenges as it implements its major restructuring plan instigated by the new CEO 11 months ago.

The year-over-year revenue decline is largely a result of changes in pricing terms with a large travel client, the weakness of Sterling and lower volumes in the travel sector. However, there were signs of improvement as volumes increased in retail CPG and the auto claims business.

The sales force has now been restructured into vertically focused 'hunters' signing new prospects and 'farmers' building revenues from existing clients. New business heads have been recruited for all the vertical practices and are now in place, based either in the U.S. or U.K. to be closer to clients. The sale team now stands at 47 FTEs, 20 of which are new to the company. WNS expect to see further hires of more junior level business development personnel during Q4 and into fiscal 2012. The early results of the sales restructuring include:

• Two contracts with an existing F&A client for which WNS will begin to provide insurance support services.
• Two new clients for which they are in the final negotiation stages and that should make a revenue impact in fiscal 2012

WNS is also looking to build its onshore presence currently assessing new opportunities in the U.S and continental Europe as well as expansion of its U.K. service delivery operations.

The attrition rate at 42% remains one of the highest in the industry and the CEO states that this is now a top priority for all senior management and a key issue for the newly appointed Chief People Officer hired during the quarter. The high attrition rates are occurring in India and the Philippines with personnel turnover in Costa Rica, Romania and the U.K remaining at lower levels.

Crawford's management seem to have mis-judged the state of the market with a significant reduction in full year guidance from that given just 3 months ago. As a result, there has been acceleration in the ongoing cost management initiatives and a further ~150 headcount reduction across the U.S. operations (~3% of the total U.S. headcount) during the quarter.

Within the international business, usually one of the strongest performing units, revenue declined by c. 1% in constant currency principally as a result of decline in volumes from the Canadian market which accounts for ~30% of international revenues. Management has instigated cost management initiatives within the Canadian unit as a result. There was an increase in transaction volumes in the U.K. and Australia as well as new client wins in the U.K., South Africa and Spain during the quarter and these effects should feed through during Q3 and Q4

The U.S. P&C business revenues declined due to lower claims volumes (down to 3,800 cases in the quarter compared to 8,500 in Q2 2009) resulting from the mild U.S. weather and lack of catastrophic events in the last 6 months.

The Broadspire unit continues to suffer from the decline in the workers' compensation market driven by the U.S. unemployment rate, still at c. 9.5%. However, Crawford appears to be gaining some market share with new business wins that will contribute ~$8m annualized revenue and there was a slight sequential uptick in the claim volume (51,400 in Q2 vs. 51,000 in Q1)

Whilst the Legal Settlement Administration business is challenged by pricing pressure in the sector, it has been retained by the administrator to assist in the creation and management of the Independent Gulf Coast Claims Facility in the wake of the BP oil spill.