Disability Plus Gives MLB Clubs Way to Hedge Against Players Underperforming

Disability Plus Gives MLB Clubs Way to Hedge Against Players Underperforming

Businesses regularly seek out ways to manage downside risk.

Airlines hedge fuel prices. Agricultural companies hedge weather-related perils. Canadian sports franchises will even hedge the USD/CAD exchange rate. 

“They all value stability in, and the forecast-ability of, their costs and revenues,” John Abbamondi (CEO, LongBall Capital) said.

But sports properties have historically been unable to protect against their greatest liability–player underperformance. 

“The guaranteed contract, where a player gets paid the same amount regardless of how well or how often he plays, presents a big risk transfer to the club,” Abbamondi said.

While traditional disability insurance covers injuries that sideline a player for an extended period, there’s been nothing to protect teams against the broader set of happenstances that can influence performance. Traditional disability also often excludes certain body parts (think: pitcher with a history shoulder injury) and almost always has a deductible period.

“The idea that you have billion-dollar companies, with hundreds of millions of dollars in expenses, and little ability to hedge downside risk, probably only exists in sports,” Abbamondi said.

That may be changing, though; at least, for Major League Baseball clubs. 

LongBall Capital recently introduced Comprehensive Player Impairment & Disability Insurance. The new league-approved product pays out when a player’s ‘runs above replacement’ (an overall measure of a player's on-field performance) dips below a certain threshold, regardless of why.

The former Brooklyn Sports & Entertainment CEO believes the coverage, more commonly known as ‘Disability Plus’, has the “potential to transform competitive balance within leagues, and alter how teams view contracts and manage their cash.”

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Abbamondi came up with the idea for ‘Disability Plus’ a decade or so ago, just as the money in sports was starting to get big. 

“I was with the St. Louis Cardinals at the time, and we used to buy the traditional disability insurance product,” he said. “And I would think to myself, this doesn't really hedge against what we’re worried about.” 

LongBall Capital co-founder and COO (and former Chicago Cubs and Texas Rangers assistant GM) Shiraz Rehman had a similar revelation at roughly the same time. Sure, injuries that would sideline players were a concern. 

“But what we were really worried about were players underperforming expectations,” Rehman said. 

And there are a host of other reasons that could happen (think: player playing through an injury) and byproducts that could result from it occurring. None of which were covered under existing policies.

Abbamondi began exploring ways to offset liability. 

"We were doing all these analytics internally to decide whether or not to pay a guy," he said. “I figured it should be possible for an insurance company to do the same thing and assume some of the risk.”

But the product didn’t exist. It’s likely that the analytical models available at the time simply weren’t good enough for an insurance company to take on billions of dollars’ worth of additional risk in a new class.

That has changed though within the last decade. And LongBall has found one willing to underwrite Disability Plus policies (and a reinsurer willing to provide hundreds of millions of dollars in insurance capacity).

“What our product does is effectively turn a fixed cost into a variable cost,” Abbamondi said.

Disability Plus coverage is based on a quantitative projection of how well a player is expected to play in the year(s) ahead. If he underperforms, the policy reimburses the club for up to 60% of the player’s salary or value, thereby reducing the contract’s net cost.

“From the club’s perspective, you now have a deal that looks as if the player is signed to a low base salary with lots of performance bonuses tied to the quality, as well as the quantity, of play,” Abbamondi said.

That kind of contract structure has never been available to MLB teams before. Market forces wouldn’t allow it, even if the league’s CBA enabled them to tie bonus compensation to on-field performance (think: HRs in a season). 

So, no one is exactly sure how LongBall’s new offering will impact the game. There is, however, reason to believe the product could improve competitive balance and help to spread talent out across the league.

Nearly half of elite MLB players play for just six clubs.

If small market clubs have a means of hedging risk, they may be more inclined to participate in free agent negotiations.

The additional competition should drive up the value of star player contracts. But there is a use case for Disability Plus amongst lesser paid players too.

“In insurance, there is this concept of replacement cost,” Abbamondi said.

It represents the amount an insurer will pay to replace damaged property with a new item. 

“We have the same approach with young, inexpensive players,” Abbamondi said.

Orioles’ All-Star catcher Adley Rutschman earned just $800,000 this past season. But it would cost the team many millions more to replace his value on and off the field.

And not just this season.

“Teams are often counting on these young stars to be centerpieces of their team for years to come,” Abbamondi said. What if they aren’t?”

Matt Harvey is a good example. The one-time Mets ace was dominant and earning just $600,000/year at the age of 26. He carried a 5.92 ERA from age 27 onwards.

Now teams “can insure the true value of a player’s expected performance, which may be many times his rookie salary. That can help offset lost revenue, or help acquire a new player in a trade, if a highly touted prospect doesn’t pan out.” Abbamondi said.

It remains to be seen how Disability Plus impacts the average player. Remember, there is a cost to insuring contracts (think: ~10% of the player’s salary) and that money must come from somewhere. 

A club’s major league payroll is the most logical place. Their existing traditional disability budget may be another option.

Of course, all of this assumes there is demand for the product and that LongBall can distribute policies at scale. To date, it has written and issued just one.

Granted, nearly everything the company has done up to this point has been in preparation for the upcoming offseason. Most teams will buy Disability Plus when they’re signing a player to a new deal.

Should clubs see value in the product, LongBall has the potential be much more than a small insurance provider. 

For context, baseball players will collectively earn ~$5bn in 2024. If the company were to ever insure 10% of that total, its insurance limit would be $500mm/year—and its premiums would be ~$50mm.

And that’s before it expanded into any other sports. Look for LongBall to begin servicing other leagues if it can prove out the thesis.

Logic would suggest risk-adverse ownership groups will embrace Disability Plus. Why bear all the risk on guaranteed player contracts when you can share it with large corporations with big balance sheets?

If they do, competing products are certain to emerge. 

It’s possible when “we look up a decade from now there's more competitive balance and that team values have risen faster than they might have otherwise because their cashflow is more stable,” Abbamondi said.

Sports investors ought to be paying attention.

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