AF Group sold to Enstar
Why the sale and what's next.
AF Group is being purchased by Enstar - which is owned by giant investment firm Sixth Street.
(note I’ve consulted with AF Group several times times over the last 15 years but am not currently engaged)
According to NAIC, in 2024, AF Group was the 9th largest work comp insurer with about $1.55 billion in WC earned premium plus about the same in other property and casualty insurance lines. That was drop of about $145 million from the previous year which was down about $150 million from 2022. (note some other carriers’ premiums also declined but not as much while other carriers’ earned premiums increased). The 2024 annual report did indicate Commercial market’s customer retention was just over 80% - not a great number albeit in a hyper-competitive market.
(note I did ask AFGroup’s media folks for detailed financials but they declined to provide anything that was not in their annual report - which only provides three financial or performance metrics for each line of business)
When JPMorgan ran the initial sale process, sources indicated AF’s sale price might hit just under $3 billion. I don’t know what Sixth Street will pay but my guess is it will be in the $2 billion range.
Here’s why.
Multiple sources indicated the Travelers was the initial winner but backed out during due diligence. I didn’t ask anyone at AF or the Travelers about this: A) don’t want to put anyone on the spot, and B) they could inadvertently violate a confidentiality or other requirement.
Recall AF Group is owned by the Blues of Michigan, which has had significant financial issues of late (as have many large health insurers) thus selling a major asset will help shore up their balance sheet. The Blues said it lost more than a billion dollars in 2023 and 2024. Employee costs, increased medical utilization and drug costs were all named as drivers.
The PR folks at the Blues were working at a fever pitch, The Blues President said in a statement:
“AF Group has grown and expanded to a point where it needs to be aligned with a parent organization that has the potential to take it to even greater heights of success…”
I’d not there are many insurers smaller than AF Group that are doing just fine.
AF Group’s in a solid financial position. From AMBest as of 12/2024:
The ratings of AF Group reflects its balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate ERM.
Of course, that is based on past performance.
Enstar has stated AF Group will continue to operate independently although it (Enstar) will be “supporting” AF Group; AF Group’s media person indicated there are currently no plans to change existing operating locations.
Side note - AF Group was hit by a cyber attack last summer which undoubtedly caused multiple migraines and certainly didn’t help with the financials; kudos to PBM MyMatrixx for really stepping up and really helping AF during a difficult time.
Despite the solid financials, AF Group’s new owners will have some significant challenges. On top of declining workers’ comp premiums, the combined ratio for commercial markets in 2024 was 102.2. I asked AFGroup for the WC-specific CR; AFGroup would not provide it.
Sources indicate the latest WC combined is around 100, note the industry average for 2024 was 14 points lower.
That’s a lot.
It’s also been increasing over the last few years. AF made significant progress reducing medical expense several years ago but progress appears to have stalled out.
As AF couldn’t make an underwriting profit when the rest of the industry was enjoying record profits there’s a problem.
From S&P:
The stable outlook reflects our expectation that AF Group's performance will face near-term strain but rebound to profitability beyond our 24-month forecast period. We expect the company to focus on core business lines and remediate operating performance in non-workers compensation lines of business.
Sources indicate AF Group’s hasn’t made much progress in improving/enhancing work comp claims/medical management over the last couple of years; that may be a key factor in Commercial Markets’ high combined ratio.
Staffing is also a challenge; a portion of AF Group’s staff is part of a bargaining unit (union); Michigan is a very labor-friendly state so it may prove difficult for the new owners to reduce WC staff - union or not - if workers’ comp keeps bleeding premium and claims counts continue to decrease. (I’ve got nothing against labor-friendly states; someone has to stand up for regular working folks these days).
What’s next
Over the past 15 years I had the privilege of working with some really good people at AF Group; while I provided advice and counsel they did the hard work and heavy lifting needed to improve results and better care for injured workers. For unknown reasons that work did not continue; even today the focus has been on issues that have been - at best - tangential to the core issues. Changing PBM vendors when drug costs are at a historic low is one example.
Here’s hoping AF Group’s new owners are able to refocus on medical management; enable smart, qualified employees to make decisions re medical; and concentrate their attention on the cost and care drivers that are meaningful for both the quality and cost of care.
What does this mean for you?
The time to fix the roof is when the sun is shining. Other carriers would do well to take that to heart.
Yes that means you.