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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

  • 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


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Contributors

  • Actuarial Disciplines

    • Health

    • Employee Benefits

    • Life

    • Property & Casualty

  • Other Professions

    • Accounting

    • Investment Banking

    • Legal

Insurance Industry Mergers & Acquisitions


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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


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Content

  • M&A Process

  • Finance

  • Valuation

  • Due Diligence

  • Corporate Due Diligence

  • Tax

  • Accounting

  • Integration

Insurance Industry Mergers & Acquisitions


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Process Overview

Insurance Industry Mergers & Acquisitions


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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


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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


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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


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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


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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


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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


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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


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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


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(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


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Getting to the Finish Line

  • Definitive Agreement

  • Regulatory Reviews

    • Form A

    • HSR

  • Closing

Insurance Industry Mergers & Acquisitions


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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


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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


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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


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Valuation – P&C Resources

  • Older Readings: Sturgis, Miccolis, Weiner, Whitehead, Witcraft

  • Recent Papers: Blackburn, Danhel

Insurance Industry Mergers & Acquisitions


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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


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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


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Valuation – Purchase Accounting (PGAAP)

  • VOBA

  • Value of Renewals

  • Other Intangibles:

    - Distribution Relationships

    - Insurance Licenses

Insurance Industry Mergers & Acquisitions


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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


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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


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Role of the P&C Actuary: Insurance Company Due Diligence

  • Identifying and Measuring Value Drivers

    - Marketing/Distribution Channels

    - Underwriting

    - Claims

Insurance Industry Mergers & Acquisitions


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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


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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


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Role of the P&C Actuary: Corporate Due Diligence

  • Captive Insurers

  • Carve Outs

Insurance Industry Mergers & Acquisitions


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CAS Resources

  • CAS Librarian (Erin Clougherty)

    Search for Articles, Bibliography

  • CAS On-Line Resources – (Jen DeMarr)

  • Peer Reviewers

    THANK YOU!!!

Insurance Industry Mergers & Acquisitions


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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


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Components of an Actuarial Appraisal

Insurance Industry Mergers & Acquisitions


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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


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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


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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


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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


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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


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Implementation

  • Corporate integration unit

  • Implementation teams

  • Process control

  • “Day one” issues

  • People issues

  • Importance of culture

Insurance Industry Mergers & Acquisitions


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Making it Work

  • Essentially change management

  • Leadership

  • Speed

  • Communication

  • Planning

  • Project management

Insurance Industry Mergers & Acquisitions


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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


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C r y p t s ! ! !


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Final Process

  • External peer review

  • Professional editing

  • Final editorial review

  • Layout

  • Glossary

  • Index

Insurance Industry Mergers & Acquisitions


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Bibliography

  • SOA & CAS Libraries

  • Exam syllabus

  • Textbooks

  • Industry & professional source material

  • Popular press

Insurance Industry Mergers & Acquisitions


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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