Policy Management Systems Corporation

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Policy Management Systems Corporation

One PMS Center
Blythewood, South Carolina 29016
U.S.A.
(803) 735-4000
Fax: (803) 735-5440

Public Company
Incorporated: 1980
Employees: 4,786
Sales: $435.1 million
Stock Exchanges: New York
SICs: 7372 Prepackaged Software; 7374 Data Processing and
Preparation

Policy Management Systems Corporation (PMSC) provides computer software and information services that help property/casualty and life insurance companies manage their policies. The company’s more than 90 software systems provide for the automation of many basic insurance processing functions such as underwriting, claims accounting, financial and regulatory reporting, and cash management. By 1994, PMSC had operations in 24 countries and 3,000 software systems licenses in force. The firm’s consulting services include the design and management of automation packages for clients. PMSC’s U.S. telecommunications network provides customers with the raw data necessary to set policy pricing and establish claims. After a brief foray into information services for health insurance companies, PMSC registered its first annual loss and exited that segment in 1993, due to uncertainty regarding health care reform.

PMSC began in 1966 as a division of Seibels, Bruce & Co., a South Carolina property casualty insurer. At that time, G. Larry Wilson, a sophomore majoring in business at the University of South Carolina, had a $100 per week internship at the firm. His assignment was to devise a method of automating the company’s policy administration and claims processing functions. Although Wilson’s experience with computers was limited, he worked diligently to acquire a greater understanding, often putting in eight-hour days at the company while maintaining a full course load at the university. Wilson’s rewards were swift, impressive, and enduring. By the time he was a junior, he had advanced to director of the Seibels, Bruce & Co. systems and programming department. By 1970, the year he earned his M.B.A., Wilson was a vice-president.

The software programs Wilson helped develop automated premium calculation and billing procedures, and, as word of his computer-driven business solutions spread, other insurance companies became interested. In 1974, Seibels, Bruce began selling its programs to the entire property/casualty industry. Named for the basic mainframe system that was its primary product, PMSC went public in 1981, with Seibels, Bruce holding a controlling 82 percent stake. Wilson—who became president and chief executive officer of PMSC at the age of 35—and four colleagues retained a two percent interest in the company.

Throughout the early 1980s, PMSC grew by marketing long-term licenses of its proprietary insurance software systems and related automation support systems to property/casualty insurance companies. Moreover, the company augmented its business with the acquisitions of Mutual Data Inc. and Business Computer System Inc. in 1983. However, when the property/casualty segment of the insurance industry slumped mid-decade, PMSC’s earnings flattened, and the company began to diversify its product offerings and target markets to protect itself from such downward cycles.

In 1985, PMSC began marketing information services to help underwriters and claims managers work more efficiently. PMSC expanded this business through product development and acquisition. It acquired regional information services—including Compuclaim Corp., Commercial Services, Inc., and Insurance Companies Inspection Bureau, Inc.—with the goal of amassing an electronic network that could gather and communicate data from all states and regions in the United States. PMSC achieved national coverage in the fields of motor vehicle reports (accident records), personal lines, and replacement costs by the end of 1986. Within two years, the company had also attained national coverage of premium audits and commercial lines inspections. The resulting information gathering network enabled PMSC to offer its clients the data necessary to make more informed assessments of risk selection, pricing, and claims adjusting. The diversification also reduced PMSC’s dependence on software licensing revenues from almost 44 percent in 1985 to 16.5 percent by 1993. By 1991, database services brought in 30 percent of annual revenues.

PMSC’s Series III platform was developed in the late 1980s as part of the company’s information services business. PMSC invested over $100 million in the creation of this system, which integrated information and data gathering, processing, underwriting, claims handling, and reporting processes. The system’s optical scanning and storage of typical insurance documents helped reduce clerical support and data entry, while its communications feature linked insurance agents, branch offices, and headquarters in what PMSC called “a seamless flow of information.” Despite Series III’s rather steep price—up to $50 million—by the end of 1990, PMSC had orders for the system from ten major insurance companies, including John Hancock Property & Casualty, Maryland Casualty, and five foreign insurers. Series III’s customer base included 63 insurance companies in North America, Europe, and Australia by 1992.

PMSC’s expansion of its target markets during the late 1980s added life and health insurance clients through acquisitions and joint ventures. The 1987 purchase of controlling interest in Aavant Health Management Group, Inc., of New Haven, Connecticut, brought a marketer of software for health maintenance organizations and preferred provider organizations. In 1989, PMSC invested over $16 million in the acquisition of Advanced System Applications, a Chicago-based premier supplier of systems and services to the group health insurance industry.

Over the course of the 1980s, Seibels, Bruce reduced its stake in PMSC and was replaced as a primary shareholder by International Business Machines Corp. (IBM). As part of an intensive campaign of equity investments in software companies, IBM offered to purchase 49 percent of PMSC stock in 1989. Worried that “Big Blue’s” notorious bureaucracy would adversely affect PMSC, Wilson declined the proposal. He was, however, amenable to IBM’s $116.8 million purchase of 19.8 percent of the stock. The alliance that resulted expedited software development and promoted the exchange of information between the two partners. IBM sales staff earned commissions for promoting PMSC’s software, and PMSC was able to test insurance programs designed for IBM hardware while it was still in development.

In 1992, PMSC formed Inserv, a non-exclusive joint venture, with IBM subsidiary Integrated Systems Solutions Corp. Inserv was created to provide “outsourcing,” or consultant-oriented automation services to property/casualty, life, and health insurers. While most analysts regarded this combination of the insurance industry’s top hardware and software suppliers as fortuitous, some insisted that in-house information systems would continue to prevail. In response, Inserv’s organizers promoted the financial and technological benefits of outsourcing to prospective clients. Wilson told Computerworld in March 1992 that the joint venture’s niche would emerge from “the gap between [major insurance firms’] need for new technology and their [financial] ability to implement it.”

Acquisitions in the early 1990s focused on gaining access to hospital medical records, attending physician statements, and personal history interviews for the life and health insurance industries. From 1988 to 1992, PMSC’s annual revenues grew at an average rate of 23 percent, as sales doubled from $216.9 million to $497.1 million. During the same period, earnings increased at an average annual rate of 30.5 percent, nearly tripling from $20.5 million to $59.4 million. However, the company’s impressive growth was forestalled in early 1993, as the company reported its first quarter of diminished earnings in its 12 years as a publicly traded company. In fact, PMSC’s stock plummeted 41 points one day in April, losing nearly half its value in a precipitous drop from $84 to $43.

In a statement to Datamation in June 1993, Wilson attributed the tumble to the 1992 election of Bill Clinton, a Democrat whose campaign platform featured reform of the country’s health care system. Uncertain of their future, many health insurers curtailed purchases of information services, effectively choking that segment of PMSC’s business. Wilson noted that “as the industry became concerned about how changes in Washington would affect existing health companies, they cut back on purchases, and our quarterly earnings were down from $13.7 million in the previous quarter to around $10 million.” The chairperson downplayed the effects of the health care crisis on future performance, noting that the majority of PMSC customers were in the policy/casualty segment. Nevertheless, the episode Wilson characterized as “a little storm” early in the year soon prompted a reevaluation of PMSC’s entire health insurance business.

In mid-1993, the company ascertained that that year’s health insurance services revenues would only amount to half of those of 1992. As it became apparent that, either by government regulation or economic forces, the health care industry would be irrevocably changed, PMSC realized that insurers in that market would be reluctant to make a significant investment in its services “until the uncertainty regarding the ultimate outcome of reform was resolved.” The company’s decision to discontinue health insurance services resulted in a restructuring charge of $25.2 million, which contributed to 1993’s net loss of $56.1 million, as sales declined 8.9 percent to $453.1 million.

Problems mounted as a group of shareholders brought a class action suit against the company. The litigation charged that PMSC had failed “to disclose certain information regarding, among other things, its business and prospects in violation of the Federal securities laws, the South Carolina Code and common law.” PMSC denied the allegations, admitting to “errors in the application of accounting principles” in fiscal 1993’s 10-K report submitted that December. The litigation remained unresolved in 1994.

During this time, PMSC created a new business to concentrate on life insurance services, acquiring the CYBERTEK Corporation of Dallas at a cost of almost $60 million. With a customer base of 100 companies, CYBERTEK was a top provider of information management systems and processing solutions for life insurance and financial services companies. PMSC focused on integrating this company’s activities with its previously existing Series III software. PMSC also shifted its emphasis to international sales in the Australian, Canadian, and European markets. The company also formed an alliance with AT&T Global Information Solutions (formerly NCR Corporation) to develop a UNIX-based version of the Series III system. PMSC hoped to return to profitability through these new and developing businesses while remaining focused on the insurance industry.

Principal Subsidiaries

Policy Management Systems Canada Ltd.; Policy Management Systems International Ltd.; Policy Management Corp.; Policy Management Systems Netherlands BV; Policy Management Systems Barbados, ltd.; Policy Management Systems Europe Ltd.; P.M.S. Inc.; Policy Management Systems Australia Ptd. Ltd; Policy Management Systems Germany; Policy Management Systems Life, Inc.