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Drivers. International M&A monograph Gaps on syllabi Lack of standardization Lack of communication between professions Promote actuaries outside industry ERM Non-Insurance M&A. Contributors. Actuarial Disciplines Health Employee Benefits Life Property & Casualty Other Professions

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drivers
Drivers
  • International M&A monograph
  • Gaps on syllabi
  • Lack of standardization
  • Lack of communication between professions
  • Promote actuaries outside industry
    • ERM
    • Non-Insurance M&A

Insurance Industry Mergers & Acquisitions

contributors
Contributors
  • Actuarial Disciplines
    • Health
    • Employee Benefits
    • Life
    • Property & Casualty
  • Other Professions
    • Accounting
    • Investment Banking
    • Legal

Insurance Industry Mergers & Acquisitions

writing process
Writing Process
  • One meeting to discuss outline
  • Two directed meetings to write and work on collaborative chapters
    • Matrix approach
    • Most chapters assigned multiple authors
    • Each chapter assigned a “Wrangler”
    • Each chapter assigned an editor to work with Wrangler

Insurance Industry Mergers & Acquisitions

content
Content
  • M&A Process
  • Finance
  • Valuation
  • Due Diligence
  • Corporate Due Diligence
  • Tax
  • Accounting
  • Integration

Insurance Industry Mergers & Acquisitions

process overview
Process Overview

Insurance Industry Mergers & Acquisitions

preparing to sell
Preparing to Sell
  • Strategic and financial considerations
  • Assembling the transaction team
  • Types of sale processes
  • Pre-marketing
  • Marketing efforts
    • Documents
    • Process

Insurance Industry Mergers & Acquisitions

strategic financial considerations
Strategic / Financial Considerations
  • Strategic
    • Horizontal vs. Vertical (Distribution)
    • Diversification
    • Eliminate competitor
  • Financial
    • Growth (organic vs M&A); relative risk
    • Scale
    • Utilize excess capital (reinvest); returns

Insurance Industry Mergers & Acquisitions

auction process overview
Auction Process - Overview
  • Deal structuring considerations
  • Due diligence (buy and sell side)
  • Buy side evaluation
  • Bidding process
  • Negotiation
  • The “Definitive Agreement”
  • Closing the deal

Insurance Industry Mergers & Acquisitions

m a financing
M&A Financing
  • Consideration (cash, stock or other)
  • Financing providers / sources of funds
    • Equity
    • Debt
    • Mezzanine (Trups)
    • Other (Seller Notes etc.)

Insurance Industry Mergers & Acquisitions

valuation why insurance companies are unique
Valuation: Why Insurance Companies are Unique
  • “Balance sheet-based profit opportunity”
  • Long tail of insurance liabilities
  • Uncertain liabilities (“Choosing COGS”)
  • Statutory accounting and capital requirements
  • Unique rules for distributable earnings to shareholders

Insurance Industry Mergers & Acquisitions

valuation market multiples
Valuation: Market Multiples
  • Why market value = intrinsic value
  • Comparable company analysis
    • P/E and P/B
    • Embedded Value (life)
  • Comparable transaction analysis
    • Change of control
  • Discounted cashflows with terminal value
    • Greater Than / Less Than

Insurance Industry Mergers & Acquisitions

marketing on the sell side
Marketing on the Sell side
  • Process & Strategy
    • Auction vs Negotiated Deal
  • Objectives
    • Maximize shareholder value
    • Other considerations
  • Buyers
    • Strategic buyers
    • Financial Buyers

Insurance Industry Mergers & Acquisitions

due diligence what you can expect
Due Diligence: What you can expect
  • When (setting the stage)
  • Why (objectives of due diligence)
  • Who (due diligence team)
  • What (due diligence process)
  • Actuarial Due Diligence

Insurance Industry Mergers & Acquisitions

why objectives of due diligence
(Why) Objectives of Due Diligence
  • Investigation and Evaluation
    • Confirm strategic value
    • Confirm financial value
    • Confirm operational value
  • Implementation
    • Construct final bid
    • Prepare for successful integration

Insurance Industry Mergers & Acquisitions

getting to the finish line
Getting to the Finish Line
  • Definitive Agreement
  • Regulatory Reviews
    • Form A
    • HSR
  • Closing

Insurance Industry Mergers & Acquisitions

overview of project
Overview of Project
  • Excellent Process to Develop Research
  • Incorporated External Experts and Academics
  • Peer Review
  • A lot of Work….BUT an Enjoyable Experience
  • Encourage more Joint Efforts with SOA

Insurance Industry Mergers & Acquisitions

role of the p c actuary
Role of the P&C Actuary:

Seller’s Valuation Rarely Exist for P&C - Adjusting Market Multiples

  • Key Model Parameters - Premium Volume, Loss Ratios
  • Loss & LAE Reserves M&A vs. Actuarial Opinion Review
  • Quantifying Material Risk Factors
  • Valuation for PGAAP Accounting

Insurance Industry Mergers & Acquisitions

valuation life vs p c
Valuation – Life vs. P&C
  • Life more of a Financial Acquisition

P&C more Strategic in Nature

  • Life Appraisal Drives Sales Price

P&C Seller’s Appraisal Rarely Exists

  • Life – Long-term Perspective

P&C – Sometimes Short-term View More Important

  • Same Valuation Methods - DCF, EVA

Insurance Industry Mergers & Acquisitions

valuation p c resources
Valuation – P&C Resources
  • Older Readings: Sturgis, Miccolis, Weiner, Whitehead, Witcraft
  • Recent Papers: Blackburn, Danhel

Insurance Industry Mergers & Acquisitions

valuation components of value
Valuation – Components of Value
  • Statutory Net Worth
  • Embedded Value = SNW+ Value of In-force Business
  • Actuarial Value = EV + Value of New Business
  • Buyer’s Value = Actuarial Value +

Strategic Value – Integration Costs

Insurance Industry Mergers & Acquisitions

valuation purchase accounting pgaap
Valuation – Purchase Accounting (PGAAP)
  • SFAS 141 – Business Combinations must use purchase method of accounting
  • Liabilities must be stated at “Fair Value”

Loss and Unearned Premium Reserve

  • Identify and Value Intangible Assets
  • Goodwill = Purchase price – net assets including intangible assets

Insurance Industry Mergers & Acquisitions

valuation purchase accounting pgaap25
Valuation – Purchase Accounting (PGAAP)
  • VOBA
  • Value of Renewals
  • Other Intangibles:

- Distribution Relationships

- Insurance Licenses

Insurance Industry Mergers & Acquisitions

valuation p c loss reserving
Valuation – P&C Loss Reserving
  • Not Just a Balance Sheet Issue
  • Adjusting Earnings and Market Multiples
  • Cash Flows, RBC and Rating Agency are a key Concerns for P&C Companies
  • Target Company not characterized by stable historical claims experience
  • Diagnostic statistics are critical.

Insurance Industry Mergers & Acquisitions

role of the p c actuary insurance company due diligence
Role of the P&C Actuary: Insurance Company Due Diligence

P&C Acquisitions are Predominately Strategic – Know Your Buyer’s Motives

  • Life – Predominantly Horizontal Growth
  • P&C – Usually Vertical Growth

New Products

New Technologies

Distribution Channels

Underwriting Expertise

Insurance Industry Mergers & Acquisitions

role of the p c actuary insurance company due diligence28
Role of the P&C Actuary: Insurance Company Due Diligence
  • Identifying and Measuring Value Drivers

- Marketing/Distribution Channels

- Underwriting

- Claims

Insurance Industry Mergers & Acquisitions

role of the p c actuary insurance company due diligence29
Role of the P&C Actuary: Insurance Company Due Diligence
  • Unexpected Integration Costs

- Distribution Channels

- Underwriting

- Claims

- Systems

  • Identifying Material Risks

Insurance Industry Mergers & Acquisitions

role of the p c actuary corporate due diligence
Role of the P&C Actuary: Corporate Due Diligence
  • Assessing the Risk Management Program
  • Accounting for Uninsured or Self-Insured Exposure
  • Claims Made Policies
  • Security Requirements
  • Warrantees

Insurance Industry Mergers & Acquisitions

role of the p c actuary corporate due diligence31
Role of the P&C Actuary: Corporate Due Diligence
  • Captive Insurers
  • Carve Outs

Insurance Industry Mergers & Acquisitions

cas resources
CAS Resources
  • CAS Librarian (Erin Clougherty)

Search for Articles, Bibliography

  • CAS On-Line Resources – (Jen DeMarr)
  • Peer Reviewers

THANK YOU!!!

Insurance Industry Mergers & Acquisitions

what is an actuarial appraisal
What is an Actuarial Appraisal?
  • DCF analysis, where:

Distributable Cashflow = After-tax Earnings minus

Increase in Required Capital

= Premium + Investment Income

– Benefits – Expenses – Commissions

– Increase in Statutory Reserves

– Taxes

– Increase in Required Capital

Insurance Industry Mergers & Acquisitions

components of an actuarial appraisal
Components of an Actuarial Appraisal

Insurance Industry Mergers & Acquisitions

actuarial appraisal issues
Actuarial Appraisal Issues
  • Uses of an appraisal beyond a single “value”
  • Basis for assumptions
  • Description of specific issues for a range of business: Life, Health, and P&C

Insurance Industry Mergers & Acquisitions

tax issues
Tax Issues
  • Understanding the impact of federal and state tax issues on M&A transactions
    • Transaction structuring can be highly tax-sensitive
    • Post-closing tax opportunities affect the value of the target
    • Investigating tax issues is an important part of the due diligence process

Insurance Industry Mergers & Acquisitions

taxable transactions
Taxable Transactions
  • Stock sale vs. asset sale
    • Recognition of gain or loss
    • Capital vs. ordinary
    • Basis in stock vs. basis in assets
    • Economic value of amortization deductions
  • Asset sales in the insurance industry—reinsurance
    • Assumption reinsurance and coinsurance
    • Treatment of ceding commission
    • DAC Tax
    • Allocation of basis

Insurance Industry Mergers & Acquisitions

accounting
Accounting
  • What constitutes a “business combination”
  • Identifying the acquiring entity
  • Determining acquisition date and purchase price
  • Direct costs and contingent considerations
  • Purchase Price Allocation (US Purchase GAAP)
    • Fair Value of Invested Assets
    • PGAAP Liabilities
    • Value of Business Acquired (VOBA)
    • Intangible Assets, including Goodwill
    • Deferred tax
  • Reinsurance and Statutory Accounting Principles

Insurance Industry Mergers & Acquisitions

integration
Integration
  • Successful outcome of acquisition hinges on integration!
  • Comparatively little typically spent on integration vs acquisition
  • Goal is to capture the value drivers used to justify the acquisition to the board

Insurance Industry Mergers & Acquisitions

implementation
Implementation
  • Corporate integration unit
  • Implementation teams
  • Process control
  • “Day one” issues
  • People issues
  • Importance of culture

Insurance Industry Mergers & Acquisitions

making it work
Making it Work
  • Essentially change management
  • Leadership
  • Speed
  • Communication
  • Planning
  • Project management

Insurance Industry Mergers & Acquisitions

c r y p t s
C r y p t s ! ! !

“In making acquisitions over the years, we\'ve tried our best to get good quality assets to back the liabilities. Cash is always best - investment grade bonds are fine - and good quality mortgages are acceptable.

But when you\'re buying a company, or taking over a block of business that\'s in receivership, sometimes you get assets that are not as desirable…”

Insurance Industry Mergers & Acquisitions

final process
Final Process
  • External peer review
  • Professional editing
  • Final editorial review
  • Layout
  • Glossary
  • Index

Insurance Industry Mergers & Acquisitions

bibliography
Bibliography
  • SOA & CAS Libraries
  • Exam syllabus
  • Textbooks
  • Industry & professional source material
  • Popular press

Insurance Industry Mergers & Acquisitions

project scope
Project Scope
  • 500 Pages
  • 100+ contributors
  • $150,000 budget
  • 5,000 projected sales
    • Actuaries
    • Industry Executives
    • Professionals
    • Risk Managers
    • Students (SoA, CAS, MBA)

Insurance Industry Mergers & Acquisitions

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