MERGER OF CAYMAN
CAPTIVES
Kay Carter: Solomon Harris
Janet Hale: Alliant Insurance Services
Lisa Havens: Baylor Scott & White Health
Julie Robertson: Honigman Miller Schwartz and Cohn
Introduction
• Merger and acquisition activity leads to need to evaluate,
rationalize and consolidate insurance programs
• We’ll be discussing considerations in doing so, from the
perspective of the owner/insured and the insurance
consultant
• We’ll also address the tax and legal considerations in the
structuring and implementation, from a U.S. perspective and a
Cayman perspective
3
It Begins . . . .
•
•
•
•
Analysis during due diligence phase
Key items to be aware of before date of merger
Work after merger
Assemble the right team (integration team and service
providers)
4
It Begins . . . .
• Begin the due diligence process
– Access materials already provided or prepared
– Looking for
• Differences and similarities in programs (funding and reserving; insurance
program structure; policy terms, processes, carriers)
• Potential areas of concern (tax; regulatory; disputes with insureds/owners
(former/current), reinsurers; unfunded liabilities)
• Opportunities for efficiencies/cost savings
• Address any confidentiality/antitrust issues
• Determine the timeline
– What must be accomplished at close?
– How soon afterwards will there be a unified program?
• Objective: Determine whether to keep multiple captives or
consolidate programs? And if consolidation, in what manner?
5
Keeping Multiple Captives
•
•
Less common
– More costly to operate
– Less efficient from an administrative standpoint, even if captives are in same domicile
– May be inconsistent with goals of integration at owner level
– Harder to achieve savings in insurance costs
But may be useful
– One captive has liabilities the other doesn’t want to assume
– Owner desires multiple vehicles for different purposes
• Insurance provided by geographic area
• Different structures may be useful in future (e.g., cell captives, U.S./non U.S.
captives/RRGs)
• Different allowable coverages in different domiciles (TRIA, punitive damages, ERISA
benefits)
• One for taxable, one for tax-exempt risk
– Intent is to “spin-off” one part of the business in the future
– Maintain relationships in multiple domiciles
– Cannot obtain necessary consents to consolidation
6
For a Combination
• Preliminary considerations
– Domicile for survivor?
– Any segregated portfolio companies?
– Third party consents required?
• Tax considerations
– Need to understand tax status and positions of both captives CFC, PFIC, Non-CFC, Noninsurance company, U.S. corporation/953(d) election, pass-through entity / "check the
box" election / IRS Form 8832)
– Conduct due diligence on state, federal, domicile tax matters
– Determine whether it’s possible to structure as tax-free reorganization under Section
368 of the U.S. Tax Code
– Consult tax advisors early in process to ensure documentation supports tax treatment
7
For a Combination
• Options from a legal perspective
– Loss portfolio transfer
– Merger or consolidation (Cayman or foreign law)
– Scheme of arrangement (Cayman law)
• Loss Portfolio Transfer (like asset/liability transfer)
–
–
–
–
–
Transfer approved by captive boards and generally shareholders
Regulatory approval
Third party consents
Subsequent dissolution
Generally takes less than three months (excluding dissolution)
8
Baylor Scott & White Health
• Resulted from the merger of two Texas based system, Baylor
Health Care System and Scott & White, in 2013
– Baylor Health Care System, founded in 1903 and based in
Dallas, Texas
– Scott & White Healthcare, founded in 1897 and based in
Temple, Texas
• Both nonprofit systems
• Over one year from the first announcement to the effective
date of the merger
9
Baylor Scott & White Health
10
Baylor Scott & White Health
• Both had Cayman Islands captives
– Baylor’s captive primarily was used as a pass through for
reinsurance
– Scott & White’s captive retained risk and was used to write
excess/access reinsurance
• After the affiliation, looked to integrate programs
• Decision was not to keep two captives
• Then had to decide: merger or consolidation?
11
Merger or Consolidation
• Merger: surviving company is a constituent
• Consolidation: consolidated company is a new company
• Procedures are identical
–
–
–
–
–
•
Good standing and solvent
No constitutional prohibition of merger or consolidation
No tainting
Consent of secured creditors
All regulators approve
Effective Date
– Filing date or date up to 90 days later
12
Merger Procedure
Authorisations and Consents
• Directors - approve merger and draft Plan of Merger
• Shareholders - pass special resolution (unless vertical
merger)
– If meeting, 2/3 of voting shareholders must pass
– If resolution in writing, must be passed unanimously
• All regulator(s) must approve in principle/take no objection
• All secured creditors must consent; if not, may apply to
Court to waive requirement
13
Merger Procedure
Documents Required
•
•
•
•
•
Special resolution
Plan of Merger
Declaration or affidavit of director
Undertaking
Fees
14
Merger Procedure
Foreign Captives
• Declaration or affidavit by director of the Cayman surviving
company
• May be the surviving company
• If so, cannot be against the public interest to permit the
merger
• Need equivalent of Certificate of Good Standing from foreign
registry/registries
• CIMA may require evidence of good standing from foreign
regulator(s)
15
Merger Procedure
Filing
• Plan of Merger signed by a director of each constituent
captive
• Certificates of Good Standing for each constituent captive
• Declarations/Affidavits of director on behalf of each
constituent captive
• Undertaking
• Letters from regulator(s)
• Fees
16
Merger Procedure
Dissenting Shareholders
• Dissenting shareholder entitled to be paid fair value of
shares
• Must follow procedure in Companies Law
• Constituent captive or surviving company obligated to
offer to purchase dissenting shareholder’s shares
• Purchase price must be paid to dissenting shareholder in
cash
17
Scheme of Arrangement
•
•
•
•
Can do merger or division
Must apply to Grand Court
Court may order a shareholder(s) meeting to consider
Documents required:
• Scheme of Arrangement (similar to Plan of Merger)
• Explanatory Memorandum
• Petition to commence action
• Affidavit of director
• Approvals of BoD and shareholder(s) (special resolution)
• Reporting affidavit
• Approval of regulator(s)
• Cost
18
Baylor Scott & White Healthcare
• Captives merged 7/1/14
• The wrinkle: also converted surviving company to
segregated portfolio company
• “Onshore” education and governance
• Assembling the new team
• Integrating the insurance programs
19
Key Risk Financing Issues
Best Practice Perspective
•
•
•
No right way/ wrong way
Opportunity to “re-imagine” with changing healthcare environment
Blank Sheet of Paper Approach
Resolution of Variances
•
•
•
•
Culture
Program Structure
Reinsurers
Vendors
Marketing a Consolidated Program
•
•
•
Objective Criteria
Subjective Criteria
What potential markets want to know
Manuscripting a New Policy Form
•
•
Key Focus Areas
Checklist Items
20
Best Practice Perspective
• Resist the tendency to pick one program over the other
• Use as opportunity to totally re-evaluate risk as it relates to
the new healthcare environment
–
–
–
–
–
–
“Managed Care” activities
“Financial Loss” Triggers
JV’s/ Affiliations
Research
Employed Physicians
Ebola
• Determine commonalities and variances
• Opportunity to combine “best practices” of each merger
partner
21
Resolution of Variances
• Chances are pretty good that you will NOT have the
same expiration dates, same captive program
structure, same tolerance of risk, same reinsurers,
same exposures, and same vendors . . . .
• Culture Check
– Determine the “risk philosophy” that promotes the
strategies of the new organization
•
•
•
•
Compare/contrast current risk philosophies
Benchmarking
Leadership input
Differences in Culture – how will they be resolved?
22
Broker Objectives
• Develop a Risk Financing/ Insurance Program that
supports the new Combined Entity Risk Profile;
• Move towards concurrency for all captive programs;
• Consolidate programs where there is consistency in
program structure/ philosophy and a cost savings to do
so;
• Keep parallel programs where it is advantageous to do
so; and
• Take a “clean sheet of paper” approach to structure the
best program for the new organization
23
Resolution of Variances
Program Structure
Decisions
What Risk is Assumed in the Captive?
Practical Considerations
•No risk assumed in the captive
•Traditional GL/HPL/WC?
•Additional Lines/ retentions/ coinsurance
•Prior Acts – Included? Tail? LPT?
•CIMA in Loop
Traditional or Integrated?
•Analyze options
•Use as opportunity to address new and emerging risk
Retention/ Limit Analysis
•Does it make sense to assume more risk?
•What is the totality of risk across the enterprise?
•Tendency is to increase retentions on all lines of coverage – but need to evaluate
losses that trigger multiple policies
Physicians/ In or Out?
Consolidate programs immediately or in
future?
*Consistent Coverage
*Cost Reductions
*Administrative Efficiencies
Can some commercial insurance policies be
eliminated by rolling into the captive?
•Multiple Options need evaluation
•Actuarial Analysis
•Normally will not happen on DAY ONE (except D&O)
•Change in Control Provisions Need to be Waived
•Assignment/ Notification of Reinsurers
•Additional Insured Endorsements – new entities
•Agreement for pro rata cancellation if midterm consolidation
•Compare Reinsurance Certificate Variances
•Revisit separate commercial placements
•SPC Structure – most flexibility
•Tail Options
24
Resolution of Variances
Reinsurers
Decisions
Practical Considerations
Overlap/ Variances
•Compare reinsurance towers
•Depending on timing in the renewal cycle – may want to
meet with lead reinsurers on integration strategies
Do reinsurers fit into new program •Integration
structure?
•Physicians
•Capacity
Lead Reinsurer Analysis
Reserving/ Claims Philosophy
Selected Date if Excess
Consolidation
•Claims philosophy
•Historical relationship
•Capacity for new entity
•Contrast reporting requirements for each program
•Develop consistent reporting procedures immediately
and get reinsurer approval
•Contrast internal loss runs and develop a consistent
approach and get reinsurer sign off
•Advise Reinsurers
•Pro – Rata Cancellation or extension agreements
25
Resolution of Variances
Vendors
• Vendors
– Brokers
– Actuaries
– Captive Managers
– Captive Counsel
– Auditors
– Investments
26
Marketing a Consolidated Program
Key Issues
Practical Considerations
Objective Criteria
•Stratified Loss Information
•Exposure Evaluation & Consolidation
•Pro-Forma Financials
•Integration impact – employees, facilities, physicians,
HR, patient safety, quality, etc.
Subjective Criteria
(Most Important)
•Senior Leadership
Relationship
Strategy/Vision for a Combined System
Future Acquisitions?
•Integration Plan
What Underwriters Want to Know
•See Following List
27
Questions from Reinsurers
Strategy/ Vision
•
•
•
•
•
•
•
Provide an update on the vision for the integration – short and long term?
Discuss the operating environment and business strategies for 2014 as a combined Health System.?
Differences in culture? How are they being resolved?
Senior Management/ Leadership Changes?
Future Mergers/ Acquisitions?
What strategies have been implemented or are in the process of being implemented to address healthcare reform?
Research Dept. initiatives for the new organization
Financial
•
•
•
•
•
Financial update and consolidation projections for YE 2014
What is the 2015 financial outlook?
Do you anticipate any capital spending in next 12 months due to the merger?
Please discuss the current status of bonds, and the current amount outstanding. Are there any plans for additional bonds?
Provide some color on financial challenges – government funding cuts, reimbursement issues, bad debt, decreasing patient
volume, competition, etc.
Legal/ Regulatory
•
•
•
•
•
•
Describe new compliance & audit program structure
Discuss new Human Resource structure and how this will impact employees
Update on Texas Tort Reform – any expansion to outside TX jurisdictions?
Please discuss any changes to retirement plans and integration of the separate health system plans.
Describe any antitrust concerns with strategy/vision/future of organization
Managed Care/ ACO Exposure – general discussion on current ACO exposure, plans for future growth, etc.
28
Questions from Reinsurers
Operational/Integration Progress
•
•
•
•
•
•
•
•
•
Describe the integration of the overall delivery system
Discussed how employed physicians will be handled within the new organization
Comment on discussions with your healthcare providers in regards to integrating both health systems.
What has been implemented with Medicare/Medicaid?
Discuss how best practices from each organization have been incorporated into the new organization
Describe IT and Back-office integration as well as respects protection of PHI – any cyber related concerns?
Any significant cost reductions including employee layoffs within the next 12 months? Other cost-cutting
initiatives?
Updates on efforts for population health management
Patient safety / quality
– Engaging physicians in improving the culture of quality/ programs implemented to address
– Redesigning care processes – any new products, vendors, programs?
– Pay for Performance – ways to evaluate all stakeholders
Risk Management
•
•
•
•
•
•
•
•
•
•
What has been accomplished in the first 100 days?
What does the integrated Risk Management Dept. look like?
Integration of PCE’s/Reporting – variances and plans to resolve
Reserving practices of the new organization
Update on combined loss history
Risk philosophy of the new organization - level of retained risk before excess attaches?
What will the consolidated excess program structure look like?
Uptick or any changes in lawsuit volume/ trends in lawsuit allegations?
Update on Texas Regulatory Environment – any increase in federal/state/accreditation oversight and what
initiatives are in place to handle?
Medical necessity/ billing practices – checks and balances to help identify outlier/irregular billing patterns/
practices; how medical necessity is monitored; any adverse findings from DOJ investigations, etc.
29
Manuscripting a New Policy Form
Focus Areas
Checklist
Who is an Insured?
•How are Partnerships/JV’s/Affiliations handled?
•How are Physicians covered?
•Consistent approach when not the majority owner
Coverage Triggers
•Of course GL/PL – but what about business practice
exposure/financial loss/ E&O?
Treatment of Managed Care
Treatment of Research
Aviation Revisited
Treatment of Work Related Injury
Pre-negotiate Tails
•Entities are now doing “managed care” activities that are not
under a traditional Managed Care Organization (MCO)
•Re-evaluate this exposure and address either under a traditional
MCO Policy – or under the primary/excess captive program
•Beware of MCO Exclusions on D&O
•Meet with Research Depts. to evaluate the new entity’s
approach to research
•Check Helicopter Contracts
•Helipad Exposure
•Hangarkeeper’s Liability Exposure
•Occupational Disease Triggers
•Rethink Employer’s Liability
•6 year options
30
Lessons Learned/Recommendations
•
•
Challenges:
– Getting the attention of the right people during a very busy, stressful time
– Time consuming
– Politics
– “That’s the way we’ve always done it”
Success factors:
– A workplan to identify responsibility and key dates
– Good communications with decision makers, advisors
– Senior leadership meeting with underwriters was very important
31
32