PFMM Advanced: Mergers & Acquisitions in a Mutual Insurance Company

Transcription

1 PFMM Advanced: Mergers & Acquisitions in a Mutual Insurance Company Tuesday, May 21, 2013, 4:15 p.m. Leon Rives, CPA Founding Partner Rives & Associates, LLP Lexington, N.C. Leon L. Rives II, CPA, is founding partner of Rives & Associates, LLP. Leon heads the firm s tax, audit, accounting, and attest services practice that serves local, national, and international audit and attest clients. His wide variety of experience extends beyond the traditional financial statement services to include assisting clients with new statements of statutory accounting principles implementation, internal control solutions, valuations, fraud detection engagements, special projects, mergers and acquisitions, reinsurance analysis, insurance tax compliance and planning, and accounting, underwriting, claims, forensic, insurance, and reinsurance audits as well as other regulatory developments. Leon s services to clients also include financial and compliance audits, agreed-upon procedures, statutory accounting, and strategic and financial planning. He is responsible for monitoring and commenting on all audit and accounting developments and ensuring that clients are kept updated and advised on the impact of new accounting standards. Leon s work experience includes more than 10 years in statutory accounting. Throughout his career, he has lead insurance audit and attest teams through unprecedented change in accounting standards. In addition, Leon has served as a leader for various discussion panels in regard to the implementation of new internal controls in insurance organizations and implementation of new statements on statutory accounting principles. Leon has authored and lectured many courses, including The Model Audit Act, Property Casualty Financial Reporting, and Insurance Industry Financial Analysis and Update. He is also responsible for driving the strategic direction of Rives & Associates and promoting an objective of providing high-quality audit, accounting, tax, and advisory services to clients in the best professional manner. Leon is a member of American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants. Leon is proud to serve on the boards of directors for a wide variety of charitable profit and nonprofit organizations. He received a bachelor s degree in business administration with a major in finance and a bachelor s degree with a major in accounting from UNC-Charlotte. In addition, Leon has attained his Accredited in Business Valuation credential.

2 Session Description: Attendees of this session will take away specific nuts and bolts of potential merger and acquisition strategies, as well as how pros and cons of merging with another mutual. The session will focus on the financial implications of a merger and include case studies. Top Three Session Ideas Tools or tips you learned from this session and can apply back at the office

3 PFMM Advanced: Mergers & Acquisitions in a Mutual Insurance Company Session Outline Overview Mergers & Acquisitions: What is the Difference? Should I Consider a Merger or Acquisition? Pros Cons Case Studies Acquisition Acquisition Type 2 Merger What Key Issues in an Acquisition? Buyer Seller What Key Issues in a Merger? What Do I Do Now? What Are The Roles of Professionals? Attorney CPA Firm Actuary Questions & Answers

4 NAMIC Leadership Forum Mergers & Acquisitions in a Mutual Insurance Companies Speaker for Today Leon L. Rives II Managing Partner of Rives & Associates, LLP President of NC Assoc. of Mutual Insurance Comapnies Certified Public Accountant Accredited in Business Valuation 12 Years Experience in the Mutual Insurance Industry 2013 NAMIC Leadership Forum - Rives Page 1 of 11

5 DISCLAIMER Please evaluate your own situation and consult with your advisors. Mergers & Acquisitions: What is the Difference? Answer in the mutual world is not much, but Merger definition: two companies become one Typically you would see some board presence from both combining companies, management may stay in place, etc Merger definition: two companies become one Acquisition definition: a company gained or acquired Surviving company is in complete control 2013 NAMIC Leadership Forum - Rives Page 2 of 11

6 Should I Consider a Merger or Acquisition? Pros Develop New Markets Develop New Lines of Business Acquire expertise Find a succession plan for a soon to be retiring manager Obtain economies of scale, i.e. a combined company may be more profitable than the sum of its parts Should I Consider a Merger or Acquisition? Cons Different Corporate Cultures Most likely jobs will be lost Since mutuals are owned by the policyholders there are a few hurdles to jump through, policyholder vote, etc. It may be expensive Lack of focus on the core business while working on the merger 2013 NAMIC Leadership Forum - Rives Page 3 of 11

7 Case Study #1 Acquisition Target Company had a great deal of surplus and premium writing had become limited Target Company desired to distribute their surplus to the policyholders Target Company did a Loss Portfolio Transfer (LPT) to Acquiring Company Acquiring Company took on the current insurance contracts and the loss portfolio in exchange for a transfer of surplus from Target to Acquiring Company Target Company then went into run-off and distributed its surplus End Result: Policyholders of Target benefited by getting a policyholder dividend Acquiring Company obtained a book of business and profited by taking on the risk of the LPT Target had to stay active for three years to ensure there were no tail issues according to the state department Case Study #2 Acquisition Type II Target company was looking to enter the commercial lines market Two regulatory environments Buyer was looking to expand into a new region Target company demutualized and formed a mutual holding company Buyer merged with mutual holding company End Result: Target company became a wholly owned subsidiary of surviving mutual company All policyholders of target became members of the surviving company Target company was able to use buyer s financial strength and expertise to enter the commercial lines market. Buyer was able to use the agency connections of the target to expand into the target s region. Both companies can be used to write the same product, with different pricing structures, e.g. Preferred, Standard 2013 NAMIC Leadership Forum - Rives Page 4 of 11

8 Case Study #3 Merger Target Company had been incurring significant underwriting losses for several years Surviving Company was growing and needed additional premium base Target Company transferred its surplus to Surviving Company Surviving Company agreed to keep the offices of Target open for a finite period of time End Result: Policyholders benefited by a decreased expense ratio, i.e. needed one accountant, less underwriting staff, etc. The merged company obtained new markets, different lines of business The merged Company was more profitable, than the sum of the two separate companies Target company s offices were open for a finite period of time A board of directors was agreed upon which provided certain board members from each company to have a seat on the Surviving company s board of directors What Key Issues in an Acquisition? Buyer: Is the Company I am purchasing financially sound? If not what will I do to make it sound? Will I make more profit after the purchase? Will I acquire any surplus as a result of the purchase? Will I be able to gain efficiencies by the acquisitions? 2013 NAMIC Leadership Forum - Rives Page 5 of 11

9 What Key Issues in an Acquisition? Buyer: Will it diversify my geographic risk? Is the Company currently underwriting good risks? Will it expand the market share? Will I be able to decrease the expense load for the combined companies? What Key Issues in an Acquisition? Seller: Is this in the best interest of the policyholders? What will happen to the employees and managers? Will any of my board members be elected onto the surviving company s board? What are the tax implications for a sale? Is the surviving company fiscally sound? Can I sell to a non-mutual company? 2013 NAMIC Leadership Forum - Rives Page 6 of 11

10 What Key Issues in an Merger? Do the companies compliment each other? Will the combined company have a decreased expense load? What will happen to each of the offices? Will there be less geographic risk? What Key Issues in an Merger? Who will be on the combined company board? Who will be the CEO? Who has more surplus? Who are the most talented people in the combined company? 2013 NAMIC Leadership Forum - Rives Page 7 of 11

11 OK Sounds like I want to Merge. What do I do now? Speak to another mutual who has been involved in a merger. Engage your CPA, Actuary, Attorney, and if it is a large transaction, a consultant Make a list of possible targets you may merge with, acquire, or be acquired Meet with other companies who may consider a merger or acquisition on your target list OK Sounds like I want to Merge. What do I do now? Once you have determined that there may be a prospect of merger, you would draft, or have your attorney draft a Letter of Intent A Letter of Intent is a NON-binding document that outlines the possible terms of a merger or acquisition, it is typically just a few pages, and is used to ensure there is no misunderstanding 2013 NAMIC Leadership Forum - Rives Page 8 of 11

12 OK Sounds like I want to Merge. What do I do now? Next begin the due diligence portion of the merger/acquisition Typically the Department of Insurance will require forecasts, and projections to approve the merger, this involves making a Plan of Merger which is then submitted to the Department of Insurance for Approval Each Company then reviews the others financials, loss reserves, actuarial reports, etc. Review reinsurance agreements, underwriting standards, accounting systems, and determine what the surviving company will use Get Policyholder approval It can take up to a year to complete the acquisition What are the Roles of Professionals? Attorney: Typically the attorney will draft the letter of intent, final merger agreement, assisting with merging the reinsurance agreements etc. The attorney will consult heavily on employee related matters The attorney will ensure compliance with general statutes The attorney will dissolve one of the companies The attorney will advise on the risk of the overall plan of merger, work directly with management, and perhaps the attorneys for the other side of the merger/acquisition 2013 NAMIC Leadership Forum - Rives Page 9 of 11

13 What are the Roles of Professionals? CPA Firm: Will assist or compile the financial statement forecasts and projections Will consult on the tax implications of the merger/acquisition Will assist in calculating and advising on potential economies of scale Will perform due diligence on the other party to ensure that the reports that have been given are accurate May perform procedures to provide assurance on the financials that have been presented Perform tax forecasts, and combined tax calculations What are the Roles of Professionals? Actuary: Will perform a reserve review and claims analysis to ensure each company is properly reserved Will compare operating ratios and other key metrics to industry norms to estimate future profitability Will assist the buyer in recognizing the synergies between the buyer s business plan and the business operations of the target Will analyze current reinsurance structure and geographic risk distribution to determine an effective use of reinsurance Will advise on new regulations or capital standards or other changes that could affect business 2013 NAMIC Leadership Forum - Rives Page 10 of 11

14 Question and Answers Leon L. Rives II NAMIC Leadership Forum - Rives Page 11 of 11