Mergers and Acquisitions

Question 1

Circumstances that lead to a proper fit between a seller and a buyer of a block of insurance (6)

Answer 1

1. Non-core business - the business is profitable, but is non-core to the seller and likely to be a core block for the buyer
2. High admin costs - the business is good intrinsically, but the seller is unable to meet profit targets due to high admin and marketing costs
3. Poor management - the block has poor operating results due to poor management by the seller
4. Seller’s reputation - the reputation of the seller prevents effective corrective actions (such as high rate increases)
5. Conservative reserves - the seller may have extra conservative reserves, but be unwilling to release some reserves
6. Regulatory fire sales - buying this type of business can be risky, but the buyer may be able to get a very good deal

Question 2

The role of the actuary in the M&A process (5)

Answer 2

1. Being an active member of the due diligence review team
2. Interviewing management
3. Interfacing with regulators, reinsurers, and investors
4. Acting as a general advisor to management regarding the merger and acquisition process
5. Creating an actuarial appraisal

Question 3

Code of Professional Conduct criteria for an actuary to perform appraisal services (3)

Answer 3

1. The actuary’s ability to act fairly is unimpaired.
2. There ahs been disclosure of any confluct to all principals whose itnerest would be affected.
3. All such principals have expressly agreed to the performance of the actuarial service by the actuary.

Question 4

Steps for calculating the value of inforce business (4)

Answer 4

1. Develop a projection model - the type of model will vary based on the time allowed for the analysis and the quality of data available:
   a. Windshield appraisal model - appropriate where time is very limited and data is scarce (this will produce only a rough estimate)
   b. Intermediate detail model - these often result from a lack of detailed data
   c. Full-blown appraisal model - the preferred approach when there is appropriate time and data
2. Determine starting in force values - should reflect the impact of actions already taken
3. Create a specific set of assumptions that reflects reasonable expectations for the business
4. Perform the projection by applying the starting values and assumptions to the model