Drivers
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International M&A monograph
Gaps on syllabi
Lack of standardization
Lack of communication between
professions
Promote actuaries outside industry
– ERM
– Non-Insurance M&A
John Butler, Al Hines & Jim Toole
Page 2
Insurance Industry Mergers & Acquisitions
Contributors
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Actuarial Disciplines
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Health
Employee Benefits
Life
Property & Casualty
Other Professions
– Accounting
– Investment Banking
– Legal
John Butler, Al Hines & Jim Toole
Page 3
Insurance Industry Mergers & Acquisitions
Writing Process
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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
John Butler, Al Hines & Jim Toole
Page 4
Insurance Industry Mergers & Acquisitions
Content
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M&A Process
Finance
Valuation
Due Diligence
Corporate Due Diligence
Tax
Accounting
Integration
John Butler, Al Hines & Jim Toole
Page 5
Insurance Industry Mergers & Acquisitions
Process Overview
John Butler, Al Hines & Jim Toole
Page 7
Insurance Industry Mergers & Acquisitions
Preparing to Sell
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Strategic and financial considerations
Assembling the transaction team
Types of sale processes
Pre-marketing
Marketing efforts
– Documents
– Process
John Butler, Al Hines & Jim Toole
Page 8
Insurance Industry Mergers & Acquisitions
Strategic / Financial Considerations
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Strategic
– Horizontal vs. Vertical (Distribution)
– Diversification
– Eliminate competitor
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Financial
– Growth (organic vs M&A); relative risk
– Scale
– Utilize excess capital (reinvest); returns
John Butler, Al Hines & Jim Toole
Page 9
Insurance Industry Mergers & Acquisitions
Auction Process - Overview
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Deal structuring considerations
Due diligence (buy and sell side)
Buy side evaluation
Bidding process
Negotiation
The “Definitive Agreement”
Closing the deal
John Butler, Al Hines & Jim Toole
Page 10
Insurance Industry Mergers & Acquisitions
M&A Financing
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Consideration (cash, stock or other)
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Financing providers / sources of funds
– Equity
– Debt
– Mezzanine (Trups)
– Other (Seller Notes etc.)
John Butler, Al Hines & Jim Toole
Page 11
Insurance Industry Mergers & Acquisitions
Valuation: Why Insurance
Companies are Unique
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“Balance sheet-based profit opportunity”
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Long tail of insurance liabilities
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Uncertain liabilities (“Choosing COGS”)
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Statutory accounting and capital
requirements
Unique rules for distributable earnings to
shareholders
John Butler, Al Hines & Jim Toole
Page 12
Insurance Industry Mergers & Acquisitions
Valuation: Market Multiples
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Why market value = intrinsic value
Comparable company analysis
– P/E and P/B
– Embedded Value (life)
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Comparable transaction analysis
– Change of control
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Discounted cashflows with terminal value
– Greater Than / Less Than
John Butler, Al Hines & Jim Toole
Page 13
Insurance Industry Mergers & Acquisitions
Marketing on the Sell side
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Process & Strategy
– Auction vs Negotiated Deal
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Objectives
– Maximize shareholder value
– Other considerations
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Buyers
– Strategic buyers
– Financial Buyers
John Butler, Al Hines & Jim Toole
Page 14
Insurance Industry Mergers & Acquisitions
Due Diligence:
What you can expect
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When (setting the stage)
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Why (objectives of due diligence)
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Who (due diligence team)
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What (due diligence process)
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Actuarial Due Diligence
John Butler, Al Hines & Jim Toole
Page 15
Insurance Industry Mergers & Acquisitions
(Why) Objectives of Due Diligence
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Investigation and Evaluation
– Confirm strategic value
– Confirm financial value
– Confirm operational value
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Implementation
– Construct final bid
– Prepare for successful integration
John Butler, Al Hines & Jim Toole
Page 16
Insurance Industry Mergers & Acquisitions
Getting to the Finish Line
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Definitive Agreement
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Regulatory Reviews
– Form A
– HSR
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Closing
John Butler, Al Hines & Jim Toole
Page 17
Insurance Industry Mergers & Acquisitions
Overview of Project
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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
John Butler, Al Hines & Jim Toole
Page 19
Insurance Industry Mergers & Acquisitions
Role of the P&C Actuary:
Seller’s Valuation Rarely Exist for P&C Adjusting Market Multiples
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Key Model Parameters
- Premium Volume, Loss Ratios
Loss & LAE Reserves
M&A vs. Actuarial Opinion Review
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Quantifying Material Risk Factors
Valuation for PGAAP Accounting
John Butler, Al Hines & Jim Toole
Page 20
Insurance Industry Mergers & Acquisitions
Valuation – Life vs. P&C
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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
John Butler, Al Hines & Jim Toole
Page 21
Insurance Industry Mergers & Acquisitions
Valuation – P&C Resources
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Older Readings: Sturgis, Miccolis,
Weiner, Whitehead, Witcraft
Recent Papers: Blackburn, Danhel
John Butler, Al Hines & Jim Toole
Page 22
Insurance Industry Mergers & Acquisitions
Valuation – Components of
Value
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Statutory Net Worth
Embedded Value = SNW+ Value of Inforce Business
Actuarial Value = EV + Value of New
Business
Buyer’s Value = Actuarial Value +
Strategic Value – Integration Costs
John Butler, Al Hines & Jim Toole
Page 23
Insurance Industry Mergers & Acquisitions
Valuation – Purchase
Accounting (PGAAP)
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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
John Butler, Al Hines & Jim Toole
Page 24
Insurance Industry Mergers & Acquisitions
Valuation – Purchase
Accounting (PGAAP)
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VOBA
Value of Renewals
Other Intangibles:
- Distribution Relationships
- Insurance Licenses
John Butler, Al Hines & Jim Toole
Page 25
Insurance Industry Mergers & Acquisitions
Valuation – P&C Loss
Reserving
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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.
John Butler, Al Hines & Jim Toole
Page 26
Insurance Industry Mergers & Acquisitions
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
John Butler, Al Hines & Jim Toole
Page 27
Insurance Industry Mergers & Acquisitions
Role of the P&C Actuary:
Insurance Company Due Diligence
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Identifying and Measuring Value Drivers
- Marketing/Distribution Channels
- Underwriting
- Claims
John Butler, Al Hines & Jim Toole
Page 28
Insurance Industry Mergers & Acquisitions
Role of the P&C Actuary:
Insurance Company Due Diligence
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Unexpected Integration Costs
- Distribution Channels
- Underwriting
- Claims
- Systems
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Identifying Material Risks
John Butler, Al Hines & Jim Toole
Page 29
Insurance Industry Mergers & Acquisitions
Role of the P&C Actuary:
Corporate Due Diligence
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Assessing the Risk Management Program
Accounting for Uninsured or Self-Insured
Exposure
Claims Made Policies
Security Requirements
Warrantees
John Butler, Al Hines & Jim Toole
Page 30
Insurance Industry Mergers & Acquisitions
Role of the P&C Actuary:
Corporate Due Diligence
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Captive Insurers
Carve Outs
John Butler, Al Hines & Jim Toole
Page 31
Insurance Industry Mergers & Acquisitions
CAS Resources
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CAS Librarian (Erin Clougherty)
Search for Articles, Bibliography
CAS On-Line Resources – (Jen DeMarr)
Peer Reviewers
THANK YOU!!!
John Butler, Al Hines & Jim Toole
Page 32
Insurance Industry Mergers & Acquisitions
What is an Actuarial Appraisal?
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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
John Butler, Al Hines & Jim Toole
Page 34
Insurance Industry Mergers & Acquisitions
Components of an Actuarial
Appraisal
Component of Value
Value
Company
O t he r
It e m s
V alue o f
F ut ur e
B usiness
V alue o f
Inf o r ce
B usiness
A d just ed
Book
V alue
Statutory Net
Worth
John Butler, Al Hines & Jim Toole
Embedded Value
Page 35
Actuarial
Appraisal Value
Total Company
Value
Insurance Industry Mergers & Acquisitions
Actuarial Appraisal Issues
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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
John Butler, Al Hines & Jim Toole
Page 36
Insurance Industry Mergers & Acquisitions
Tax Issues
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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
John Butler, Al Hines & Jim Toole
Page 37
Insurance Industry Mergers & Acquisitions
Taxable Transactions
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Stock sale vs. asset sale
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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
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Assumption reinsurance and coinsurance
Treatment of ceding commission
DAC Tax
Allocation of basis
John Butler, Al Hines & Jim Toole
Page 38
Insurance Industry Mergers & Acquisitions
Accounting
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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)
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Fair Value of Invested Assets
PGAAP Liabilities
Value of Business Acquired (VOBA)
Intangible Assets, including Goodwill
Deferred tax
Reinsurance and Statutory Accounting Principles
John Butler, Al Hines & Jim Toole
Page 39
Insurance Industry Mergers & Acquisitions
Integration
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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
John Butler, Al Hines & Jim Toole
Page 40
Insurance Industry Mergers & Acquisitions
Implementation
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Corporate integration unit
Implementation teams
Process control
“Day one” issues
People issues
Importance of culture
John Butler, Al Hines & Jim Toole
Page 41
Insurance Industry Mergers & Acquisitions
Making it Work
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Essentially change management
Leadership
Speed
Communication
Planning
Project management
John Butler, Al Hines & Jim Toole
Page 42
Insurance Industry Mergers & Acquisitions
Crypts!!!
“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…”
John Butler, Al Hines & Jim Toole
Page 43
Insurance Industry Mergers & Acquisitions
Crypts!!!
Final Process
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External peer review
Professional editing
Final editorial review
Layout
Glossary
Index
John Butler, Al Hines & Jim Toole
Page 45
Insurance Industry Mergers & Acquisitions
Bibliography
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SOA & CAS Libraries
Exam syllabus
Textbooks
Industry & professional source material
Popular press
John Butler, Al Hines & Jim Toole
Page 46
Insurance Industry Mergers & Acquisitions
Project Scope
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500 Pages
100+ contributors
$150,000 budget
5,000 projected sales
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Actuaries
Industry Executives
Professionals
Risk Managers
Students (SoA, CAS, MBA)
John Butler, Al Hines & Jim Toole
Page 47
Insurance Industry Mergers & Acquisitions
John Butler, Al Hines & Jim Toole
Page 48
Insurance Industry Mergers & Acquisitions