Actuaries play a pivotal role in property/casualty insurance mergers and acquisitions, but they can make even larger contributions by taking a broader business approach, according panelists as the recent Casualty Actuarial Society Spring Meeting in Quebec City, Canada.
Session moderator Gail Ross, principal and consulting actuary, Milliman, urged actuaries to go beyond the numbers of an M&A deal. “The key for us in our profession is to think as a broader business person,” she said.
While actuaries are most comfortable focusing on the balance sheet issues of a transaction, Ross said actuaries should be prepared to play a more prominent role in operational and profitability issues, including assessment of strategic and business plans.
“Look at the business plan of the target company. If it is operating at a combined ratio of 110 percent and the plan for next year is to achieve a 95 percent combined ratio, you probably need to question how this is conceivably possible,” she said.
Thomas Myers, vice president – product management, High Point Safety & Insurance Management Corp., noted that the four primary types of transactions are a loss portfolio (reserve) transfer; the purchase of a runoff company; the purchase of an active company; or the purchase of renewal rights. He agreed that there are additional ways for actuaries to add value to an M&A team beyond the traditional areas of loss reserve and pricing adequacy.
One example is the financial modeling process itself. “As a company actuary you may be the best person to help build the financial valuation model. Many companies will look to hire outside expertise, but certainly actuaries have the skills to do this too,” he said.
Other deal aspects where actuaries can be involved include asset valuation and investment income, future expense assumptions, growth assumptions, and other strategic implications of the deal, Myers added.
Sean Martin, vice president – investment banking, TD Securities, noted that actuaries play a key role on a P/C deal team as educators and guides to bring people up to speed on insurance issues.
Martin told attendees that there are a number of inputs that go into the valuation process of a P/C deal that rely upon actuarial expertise. These include items such as premium growth, ultimate loss ratios by business line and loss payment patterns. “The deal team would look to the actuaries and ask their opinion on these metrics,” he noted.
Reserve adjustments are also more reliant upon actuarial involvement, Martin said. “On the other hand, expenses are more of an operating assumption. That input has become more of a financial process” and generally would have less actuarial involvement, he said.
Investment yield, tax, and capital structure are also traditional financial modeling inputs for which other deal members would have more of a role than the actuaries, he added.
“Each deal will have slightly different actuarial issues,” Myers explained. While panelists agreed that the actuarial role will differ depending on the type of deal structure, Ross stated that “actuaries need to be involved in all aspects of due diligence so that their quantitative reviews reflect appropriate qualitative factors.”
Source: The Casualty Actuarial Society