Mergers for Small Mutual Insurance Companies. FMDC Program OAMIC 2012

Transcription

1 Mergers for Small Mutual Insurance Companies FMDC Program OAMIC 2012

2 Managing Risk Insurance people, be they Directors or managers, are, or should be, risk managers Managing risk involves more than our customers risks As businesses, we have our own risk to manage...

3 What is a Merger? It is, in practical terms, the death of one company. Most importantly, it is the merger of two groups of policyholders Historical Ties Company philosophies Local Sensibilities Local Institutional Support These issues are NOT trivial: some will mourn the loss of their company

4 Why Merge? There are many reasons for two or more companies to merge: Financial Condition No succession plans for Manager No succession plans for Directors The realization that one or both companies are just too small to continue A good business fit

5 Steps along the way Preliminary discussions: between managers or Board members Non disclosure agreements early on are critical Early contact with reinsurers Will your reinsurer support a merger? With this company or any other?

6 Next If there appears to be a mutual interest: engagement of legal counsel early Not just to draft final documents Lawyers are also called counselor for a reason A lawyer who has done this before Formal contact with reinsurer Formal non-disclosure agreements This is one area where the lawyer gets involved early Board level committees from all companies Other advisors may need to be involved

7 The Discussions Who is the surviving company? Who will be managing Not an issue if this is a merger for succession Otherwise, is usually a critical issue Where will the office be? A new office for the combined company? Maintain offices of both companies? Whose staff? Not so much an issue if two offices

8 The Discussions What will be the new name? Just the survivor s current name? Some combination of names to preserve historical community ties? Remember, someone has to say the name when answering the telephone, and it gets printed on letterhead and policies. An entirely new name to reflect a new beginning?

9 Merger for Succession Merger for Succession is usually to replace management It needs to be carefully thought out Why couldn t the other company find a new manager? It can be a positive way to bring together two or more companies with strong histories but a need to be larger for the future

10 Merger by Succession It probably blows up about as often as it succeeds Merger means more than a shared manager merged boards merged reinsurance merged computer systems merged agency forces merged employees

11 Mergers and Reinsurance Reinsurance is the lifeblood (and often the lifeboat) of the small mutual Be sure to coordinate mergers with your reinsurer If both companies are reinsured by the same reinsurer, the merger is likely to go smoother

12 Mergers and Reinsurers If one company has recently been dropped by the other company s reinsurer, especially the surviving company s reinsurer, expect some issues In my experience, reinsurers and reinsurance brokers are usually some pretty smart people. And dedicated to small mutuals. That makes them good people to consult.

13 Mergers and Underwriting How is underwriting handled at both companies? Staff underwriter Field underwritten by agents Inspection process and staff Special niches? Director involvement?

14 Merger and Underwriting How will it be handled in the new company? Anticipated re-underwriting of some or most of one company s book? Differences in policy terms, rates, acceptable business? How will this be communicated to agents? Do the merger documents make promises about guaranteed renewals/roll-over of the book of business?

15 Mergers and Claims How are claims handled at the companies? Staff vs. independent adjusters Tendencies towards strict vs. loose interpretation of policy provisions Post claim re-inspection of the property Limitations on future coverage pending documentation of completed repairs?

16 Mergers and Claims And how will it be handled in the future? Was claim handling a reason for the merger? Is there a significant cultural change in claim handling due to the merger? How is this to be communicated to: Policyholders Reinsurers The claim staff

17 Mergers and IT If the companies have different computer systems, special care needs to be given to this integration Choice of one system over another Conversion issue for company data Training for staff on new system, if an integrated staff Scalability of system: can the old system handle the additional business, the additional staff usage?

18 Mergers and IT Day 1 of the new company is not the day to test the new systems. Run as much testing as possible Have the vendor on stand-by, or preferably standing in the office If possible, run some of the first day s business ahead of time, so that if there s a problem, it doesn t result in paralysis

19 Mergers and other service providers Investment Managers and banks need to be aware well in advance. Contact your D&O insurer as soon as you know a merger is proceeding. Mergers are significant events, and may curtail coverage for the non-surviving company and its board.

20 Mergers Two other key constituencies: The Department of Insurance The policyholders of both companies

21 THE DOI No one would dream of not keeping the DOI informed as to the proceeding of a merger. But, they may be useful with counsel and guidance Early, often, complete communication Credibility and confidence help when dealing with the Department

22 Policyholders Communication is more than just sending a proxy, or asking them to show up and vote Remember, this is their mutual. They may need to be sold on the need for the merger Its their mutual. They can sue directors if they aren t happy with the merger decision.

23 QUESTIONS??

24 Would You Like a Copy? Contact Tim Sullivan TSullivan@NAMIC.org or call Tim (800)