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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
Garea: Exactly. As I mentioned earlier, Foundation Health has a pretty checkered past. There are different schools of thought about its CEO. And its financial guy has had his share of credibility problems.
So the combination of those two elements makes most people uninterested in bothering to figure it out. However, I think they will soon because the fundamentals are compelling.
OID: What would critics of Foundation's management say about them?
Garea: I think critics have focused on two areas: The first was the workers' comp business. And there was a charge that they were basically underreserving and, therefore, overstating earnings. But I don't believe that was the case. We did a fair amount of work - talking to different people and looking at the underlying statutory convention statements and so forth. And you can always argue or debate about these things, of course. But clearly - at least in our opinion - they weren't out on the curve.
Could they have been more conservative? Sure. Anybody could be more conservative - by definition. But it looked to us like they were being reasonable and even reasonably conservative. So that was one issue. And we're extremely comfortable there.
OID: And the concerns about the CEO and the CFO?
Garea: They used very questionable judgement in the way they dealt with their accounting for doctors' practices. However, that got taken care of because they sold that business to a company called FPA Medical. And that rendered moot all of the accounting questions. So that's no longer an issue.
OID: What role will those people be playing in the company going forward?
Garea: Foundation's CEO will be on the board for up to a year. But then he'll go away. He'll have no role in its ongoing operation. The CFO will be there for a short while. But then he'll be gone, too. As a practical matter, neither will have a role in the surviving entity's ongoing operations. It's going to be run by the Health Systems' people.
Lower down, there will be people from Foundation - because they have some very good people. For example, their workers' comp guy will run the workers' comp area. He's very good. And some of the HMO people will be involved with the successor, too.
OID: Will they operate as one entity or continue, in effect, with two brands?
Garea: They'll merge the HMOs in the states where they both operate - although it won't happen immediately just because it takes some time to get the regulatory approvals they need to do that.
Foundation Health is a little different in the respect that they have a fair amount of earnings coming from the workers' comp area. And that has two characteristics that a typical HMO would not have: First, it's inherently a lower ROE business. And second, balance sheet equity for that business matters - unlike HMOs where it doesn't.
OID: Interesting.
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