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The Effect of Latent Exposures on Mergers & Acquisitions. Casualty Actuarial Society - Seminar on Reinsurance Washington, D.C. July 12, 2001 Presented by: Bruce D. Fell, FCAS, MAAA. Overview.

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The Effect of Latent Exposures on Mergers & Acquisitions


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the effect of latent exposures on mergers acquisitions

The Effect of Latent Exposures on Mergers & Acquisitions

Casualty Actuarial Society - Seminar on Reinsurance

Washington, D.C.

July 12, 2001

Presented by: Bruce D. Fell, FCAS, MAAA

overview
Overview
  • Industry estimates of liability from latent exposures are significantly higher than the sum of amounts disclosed by companies
  • Some companies:
    • are slow to identify/quantify latent exposures
    • are under-reserved
    • have elected the business strategy of recognizing the liabilities as claims develop

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acquisition considerations
Acquisition Considerations
  • Buyers perform due diligence when considering an investment transaction
  • A major concern for investors is identifying and quantifying latent exposures
  • Many transactions die due to latent exposures uncovered in due diligence

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acquisition effect
Acquisition Effect
  • When company is faced with a merger/ acquisition situation, values are magnified
    • $1 of liability  $1+x% adjustment in transaction price (x% for uncertainty)
    • You don’t want others to uncover your exposure during due diligence!!

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effect on transaction value
Effect on Transaction Value
  • Quantitative Effects:
    • Immediate and direct effect on current earnings and equity/surplus
    • Uncertainty of future earnings drag if future costs exceed established reserve

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effect on transaction value1
Effect on Transaction Value
  • Qualitative Effects:
    • Lack of management proactively addressing liabilities can create uncertainty about overall management ability
    • What else has not been adequately addressed by management???

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solution
Solution
  • Identification of Exposure
    • Coverages that might result in exposure
    • Time span coverage was afforded
  • Quantify Ultimate Cost
    • Potential frequency
    • Potential severity
    • Timing of future claim filings & payments
    • Potential defense costs

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moral of the story
Moral of the Story
  • Be Proactive
    • Identify Exposure
    • Measure Exposure
    • Develop Solution
    • Monitor Progress
  • Don’t wait for it to come to you
    • It will ultimately cost more

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