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Objective 2 - Appraisals Flashcards

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1
Q

Challenges in Determining the Value of an Insurance Company

A
  1. Long duration of (L)iabilities
  2. Sensitivity to (I)nterest rate fluctuations and the performance of capital markets
  3. Subjective (A)rt of loss reserving
  4. (C)yclical nature of insurance
  5. Impact of reinsurance (R)ecoverables
  6. Challenges associated with (N)on-market competitors, such as state funds
  7. Varying state and sometimes federal (R)egulations
  8. Impact of (S)tatutory accounting on operational decisions
  9. Influence of (R)ating agencies

L R INS CARR (Length Regulation of INSurance CARRiers)

GHFV-130-19, Page 106

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2
Q

Techniques used by Investment Bankers to Determine the Value of a Company

A
  1. Comparable Company Analysis - The value of the company is estimated based on the values of a peer group of comparable companies
  2. Comparable Transaction Analysis - The value is estimated based on results of recent insurance mergers that are similar
  3. Comparable Cash Flow Analysis - The projected Cash flows and terminal values are discounted to a net present value using the weighted average coast of capital (WACC)

GHFV-130-19, Page 107

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3
Q

Formulas for Using a Discounted Cash Flow Analysis in an Actuarial Appraisal

A
  1. An actuarial appraisal is a discounted cash flow analysis
  2. Actuarial Appraisal value = PV (Distributable Cash Flows)
  3. Distributable Cash Flow = After-Tax Earnings - Increase in Required Capital
  4. The discount rate is the weighted average cost of capital (WACC) from the Capital Asset Pricing Model (CAPM)
  5. WACC = r = rD * %debt + rE * %equity
rD = required after-tax return on debt
rE = expected return on equity = r(f) + betaE * [r(m) - r(f)]
r(f) = risk free rate of return
betaE = the Beta (risk level) of a company's stock
r(m) = expected rate of return for the market as a whole
%dept = D / (D+E)
%equity = E / (D+E)
D = Market Value of a company's debt
E = Market Value of a company's equity

GHFV-130-19, Pages 112 and 122

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4
Q

Components of the Actuarial Appraisal Value

A
  1. Adjusted Book Value - This is the net worth of the insurance company on a statutory basis, adjusted for the value of miscellaneous items not captured elsewhere (see separate list from page 129 of study note)
  2. The value of inforce business - this equals the present value of future profits arising from business that is on the books as of the valuation date. An adjustment is included to reflect he cost of capital.
  3. The value of future business capacity - this equals the present value of future profits arising from business that is expected to be written following the valuation date. An adjustment is included to reflect hte cost of capital.
  4. Embedded Value ~~ Adjusted Book Value + Value of Inforce Business (only use EV formulas as a stepping stone to the actuarial appraisal value shown below)
  5. Actuarial appraisal Value ~~ Adjusted Book Value + Value of Inforce business + Value of Future Business (items 4 and 5 in this list are not explicitly written in the source but they have been used on past exams)

GHFV-130-19, Page 113

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5
Q

Assumptions needed for Actuarial Appraisals

A
  1. Mortality - Typically based on company experience compared to an industry standard
  2. Morbidity - Also based on company experience
  3. Persistency - lapse assumptions and any shock lapses should be considered
  4. Investment returns and spreads - consider expected investment returns, reinvestment rates, and interest rates credited on insurance policies
  5. Operating expenses - could be based on various approaches (most commonly based on target unit expenses plus an unallocated expense
  6. Discount Rate - seller typically gives a range of reasonable rates instead of a specific rate (the Capital Asset Pricing Model may be used to determine this rate)
  7. Cost of required capital - the company will have an opportunity cost associated with setting aside capital to comply with required capital regulations
  8. Taxes - the actuarial appraisal should reflect a deduction for federal income taxes

GHFV-130-19, Page 117

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6
Q

Adjustments to the Actuarial Appraisal made by Potential Buyers

A
  1. (D)iscount Rate - A buyer will reflect its internal view of the appropriate discount rate
  2. (E)xperience and Product Management assumptions - A buyer may adjust certain assumptions based on its internal views
  3. (N)ew Business Values - A buyer may adjust new business values based on its view of future business capacity
  4. (S)ynergies - a buyer may reflect the bneefits from anticipated syngergies or cost savings
  5. (S)tructure -a buyer may reflect the impact on the business fo the buyer’s tax and RBC situations

or else buyer is DENSS (Dense… Denss… whatever)

GHFV-130-19, Page 116

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7
Q

Uses of an Actuarial Appraisal

A
  1. Help (V)alue the company - potential buyers will make adjustments based on their internal views (separate list)
  2. Form the basis for (A)lternative accounting methods for cross-border transactions
  3. Can be adjusted to calculate (P)ro forma earnings and to establish the opening purchase GAAP balance sheet
  4. Measure (O)ngoing performance after the acquisition

O P VA (Ongoing Performance VAlue)

GHFV-130-19, Page 116

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8
Q

Components of the Adjusted Book Value (or net worth) of an Insurance Company

A
  1. Capital and Surplus - includes statutory capital stock, contributed surplus, and retained earnings
  2. Asset Valuation Reserve (AVR) - this liability is part of surplus and is allocated to the lines of business
  3. Interest Maintenance Reserve (IMR) - this liability represents past interest-related capital gains not yet amortized into income
  4. Deferred Tax Asset - the admitted portion of the statutory deferred tax asset is deducted from the adjusted book value
  5. Non-admitted assets - the realizable value of assets that were non-admitted for statutory purposes, if they will contribute to earnings over time
  6. Surplus notes and other debt - a reduction is appropriate for any debts owed to another party
  7. Mark-to-market on assets allocated to adjusted book value - this component reflects some riskier assets that are allocated to adjusted book value

GHFV-130-19, Page 129

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9
Q

Approaches for using reinsurance to sell a block of business

A
  1. Assumption Reinsurance - contracts are transferred from the seller’s book to the buyer’s books. The policyholder must be notified, and some states require policyholder consent to transfer the policy
  2. Indemnity coinsurance - the financial interest is transferred tot he buyer, but the policy stays with the seller. The policyholders do not need to be notified, but the seller remains in the middle of future transactions
  3. Modified coinsurance - similar to indemnity coinsurance, except that the assets backing the liabilities remain with the selling company

GHFV-130-19, Page 145

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10
Q

The Major Objectives of Mergers and Acquisitions (M&A) Due Diligence

A
  1. Confirm Strategic Value - Successful M&A bids create more value after acquisition than existed prior. (Separate list for examples of value-added strategies)
  2. Confirm Financial Value - Establish there are no “holes” in the seller’s financials and develop the assumptions needed to support the buyer’s appraisal
  3. Confirm operational Value - Compare the operational areas of both parties to determine any potential system integration issues and quantify operational findings into financial values
  4. Construct appropriate bid
  5. Prepare for successful integration

SFOBI?

GHFV-131-19, Page 187

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11
Q

Examples of Value-Added Strategies used during M&A

A
  1. Increase in (M)arket share
  2. Derivation of (S)ynergies through complementary markets, products, or distribution
  3. (E)xploitation or leveraging of superior technology
  4. Increase in (S)cale and ability to leverage existing resources better
  5. Preventing a (N)ew entrant from gaining a foothold in the market

N MESS (New entrants cause a MESS)

GHFV-131-19, Page 187

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12
Q

The Seller’s functional areas examined during the due diligence process of M&A Operations

A
  1. Financial: Requiring teamwork from the buyer’s accountants, actuaries, investment bankers, and other financial specialists
  2. Investments: Review of asset types, investment strategies, and assess any changes needed
  3. Tax: Validate the tax strategies and quanitfy various options to the buyer
  4. Legal and compliance: The legal due diligence team determines if there are any legal impediments or hidden liabilities
  5. Marketing and distribution: Marketing, specifically the distribution channels, holds the key to the value of new business, and significantly impacts the value of existing business
  6. Systems: Ensure systems are operating efficiently, have proper licensing, and ongoing costs are ascertained
  7. Human Resources: People-related costs can have a material effect on the value of a deal
  8. Product management: Affirm what the target’s practices are and plan how they will be integrated
  9. Claims: Operational review includes claim intake, validation, and settlement
  10. Reinsurance: Identify the overall exposure to certain risks to make sure that the combined entity does not end up with more risk than desired
  11. Risk Management: If the targets risk management function is robust then their documentation should be very helpful to the due diligence team
  12. Actuarial: An actuary has the specific responsibility to translate the date and information developed by the due diligence team into quantified expressions of value

GHFV-131-19, Page 196

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13
Q

Sources of Information to be used by an Actuary to Quantify Assumptions used in an Actuarial Appraisal

A
  1. Information and opinions developed by the buyer’s team during due diligence efforts
  2. Information provided by the seller
  3. External industry benchmarks
  4. General industry knowledge and experience

GHFV-131-19, Page 210

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14
Q

Areas for Actuarial Due Diligence in Life and Health

A
  1. Review of Financial Statements: Balance Sheet, Income Statement, and Experience Reports
  2. Review of Operations: Actuarial Operations, Risk Management Functions, Support other subteams
  3. Development of Buyer’s appraisal and PGAAP Pro Forma
  4. Support of bid development and negotiations
  5. Preparation of bid development and negotiations
  6. Preparation for closing and integration

GHFV-131-19, Page 212

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15
Q

Reason for Review of Experience Reports During Actuarial Due Diligence

A
  1. Reports are used as the primary basis for assumptions underlying the seller’s actuarial (A)ppraisal
  2. Reports generally (D)rive the key management metrics and explanations of earnings
  3. The seller’s experience should be (C)ompared to the buyer’s and the differences analyzed
  4. The quality of the seller’s reports reflect on the quality and (C)ompetency of the seller’s staff

listen to ACDC while reviewing these boring reports

GHFV-131-19, Page 213

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16
Q

Due Diligence Issues to Explore When Validating the Model that Underlies the Seller’s Appraisal

A

(Used as the first step in developing the buyers actuarial appraisal)

  1. Develop and (U)nderstanding of the model’s robustness, level of cell refinement, and steps taken to develop the model
  2. (S)tatic model fit: Can the model reproduce initial balance sheet items and inventory amounts
  3. (D)ynamic model fit: Can the model reproduce recent experience matching statutory or GAAP income statements
  4. (P)olicy illustration compared against model projections for a selection of specific cells
  5. (E)xperience assumptions should be reviewed for consistency with historical studies and compared to industry benchmarks
  6. Review of (M)anagement plan assumptions (production and expenses)
  7. Review of (N)ew business profitability

UPEND S M (UPEND Sellers Model, seems like the goal)

(The second step is to compare the internal consistency across various sets of “best estimates”)

  1. It can be informative to compare the seller’s appraisal assumptions to the following:
    a) Business plan assumptions
    b) Pricing assumptions
    c) Cash flow testing assumptions
    d) US GAAP FAS 97 assumptions
    e) Embedded value assumptions
  2. A comparison across the different sets of assumptions above may highlight key issues that are worth further review
  3. The last step in determining appropriate buyer’s appraisal assumptions is to compare against external industry benchmarks, which is particularly important for group products

Then, just COMPARE and DETERMINE bid

GHFV-131-19, Page 216

17
Q

Description and Formula for embedded Value

A
  1. Embedded Value (EV) is:
    a) A financial measurement basis applied primarily to long-duration insurance business that provides an alternative means of measuring value at any point in time and assessing financial performance over time.
    b) A measurement of the value that shareholders own in an insurance enterprise, comprised of capital, surplus, and the present value of earnings to be generated from the existing business
  2. EV = ANW + IBV
    a) Adjusted net worth (ANW) is the realizable value of capital and surplus. Statutory capital and surplus are adjusted to include certain liabilities that are allocations of surplus and nonadmitted assets that have realizable value
    b) (Separate list for IBV)

EV: Practice and Theory, Page 2

18
Q

Uses of Embedded Value

A
  1. Justification for stock prices and acquisition purchase prices
  2. Performance measurement for executive compensation
  3. Profitability analysis for lines of business
  4. Assessment of returns for capital allocation purposes

EV: Practice and Theory, Page 2

19
Q

Ways in Which Embedded Value Differs from Actuarial Appraisals

A
  1. Actuarial appraisals typically assign a value to the contribution of future new business, but EV does not
  2. Actuarial appraisals are typically calculated using higher discount rates than EV
  3. Expense assumptions used in calculating EV are typically more company specific than those used in actuarial appraisals
  4. In General, EV cannot be used directly to produce an actuarial appraisal. But an analyst could modify VNB, apply a multiple to it, and add that to the modified EV to produce a somewhat independent valuation of the company’s market value.

EV: Practice and Theory, Pages 2 and 11

20
Q

Formulas for in-Force Business Value (IBV) and Value off New Business (VNB)

A
  1. IBV = PVBP - PVCoC. Both present values are computed with best-estimate assumptions and are discounted to the valuation date at a risk discount rate (RDR)
    a) RDR is often based on just the cost of equity capital. But it does sometimes implicitly reflect the cost of debt as well, in which case it is referred to as a weighted average cost of capital (WACC).
  2. VNB is calculated with the same formula as IBV, but reflecting only the value of business sold in the reporting period. IT does not reflect all future years of new business like an actuarial appraisal would.
  3. PVBP is the present value of after-tax statutory book profits
    a) For a particular reporting period, statutory book profit (BP) is the after-tax net income achieved after resetting invested assets at the beginning of the period exactly equal to the statutory reserves
    b) BP(t) = Surplus(t) - Surplus(t-1) * [1 + i(t)], where i represents the after-tax rate of return on invested assets supporting surplus. This formula assumes there have been no shareholder dividends or paid-in capital during that period.
  4. PVCoC is the present value of the cost of capital
    a) the cost of capital for a reporting period represents the cost of the required capital (RC) earning a rate of return lower than the RDR. Assets supporting RC will only earn i.
    b) CostofCapital(t) = RC(t-1) * [RDR - i(t)] when there is no debt financing or debt is reflected implicitly in the RDR
    c) CostofCapital(t) = [{RC(t-1) - D(t-1) * (RDR - i(t))] + [D(t-1) * (d(t) - i(t))] when a portion of RC is funded with Debt (D) and the cost of debt (d) is not implicitly included in the RDR, but is explicitly reflected in this formula instead
  5. IBV is different than the present value of distributable earnings (PVDE) used in acquisitions
    a) PVDE = IBV + RC when there is no debt financing or debt is reflected implicitly in the RDR
    b) PVDE = IBV + (RC - D) when there is explicit recognition of debt

EV: Practice and Theory, Page 5

21
Q

Categories of assumptions used in calculating EV

A

(Assumptions used should be best estimate assumptions)

  1. Noneconomic assumptions - these should be based on the specific circumstances of the company or the business for which EV is being calculated
    a) Policyholder behavior
    b) Interest-Crediting strategies
    c) Mortality and morbidity - companies typically credibility weight their own experience with industry data. Mortality improvement should also be reflected
    d) Persistency - rates typically rely more on company-specific data than on industry data. Rates are generally set by both product type and duration.
    e) Expenses - these also rely more on company-specific data than on industry data. All types of expenses should be reflected in EV calculations. It is common to reflect expense inflation.
    f) Taxes - should reflect the amount and timing of federal and local taxes paid
  2. Economic Assumptions - these apply broadly across the economy and are not specific to the company
    a) Interest rates
    b) Asset default rates
    c) Inflation rates
    d) Investment returns
    e) RDR - may be determined using a “top-down” approach where the RDR’s risk margin is based upon a group WACC, or a “bottom-up” approach where product-specific betas are calculated (rather than a single market beta) to reflect he volatility of product cash flows

(Some assumptions have both economic and noneconomic components)

EV: Practice and Theory, Page 12

22
Q

Ways in Which Financial Options and Guarantees are Reflected in EV

A
  1. Intrinsic Value - this is the value of the financial options and guarantees at the valuation date assuming the current in-force business is projected with best-estimate assumptions (typically a deterministic scenario)
  2. The time value of financial options and guarantees (TVFOG) - this is the value of the options and guarantees given the potential changes in financial markets to increase or decrease their value before they expire
    a) Products that typically require valuations of TVFOG include variable annuities, variable universal life insurance policies, and policies that guarantee minimum crediting rates
    b) TVFOG can be calculated as a mean of the PVDE for a set of stochastic scenarios minus the PVDE for a single deterministic scenario (the best-estimate scenario that includes the intrinsic value)

EV: Practice and Theory, Page 15

23
Q

Description and Categories for an Analysis of Movement in EV

A
  1. Description of the analysis of movement - this is a reconciliation between the opening and closing EV, with the difference between the two allocated to various explanatory categories
  2. The analysis of movement decomposes the changes in EV into the following broad cateogries:
    a) Contribution from new business
    b) Contribution from in-force business
    c) Contribution from free surplus
    d) Capital Movements
    e) Other (e.g. foreign currency changes)

EV: Practice and Theory, Page 19

24
Q

Formula for Expected Contribution (EC) to EV from New and In-force Business and Free Surplus

A 
NB = New Business
IFB = In-force business
FS = Free Surplus
  1. NB_EC(t) = VNB(t) * (1 + RDR)^0.5; VNB is calculated using BoP assumptions and assuming all new business is written in the middle of the year.
  2. IFB_EC(t) = [ IBV(t-1) + RC(t-1) ] * RDR
  3. FS_EC(t) = FS(t-1) * i(t)

EV: Practice and Theory, Pages 21 and 26

25
Q

Formulas for Expected IBV and Net Income (NI)

A
  1. EIBV = expected ending IBV
    a) NB_EIBV = VNB(t) * (1 + RDR)^0.5 - NB_BP(t)
    b) IFB_EIBV = [ IBV(t-1) * (1 + RDR) ] - IFB_BP(t) + [ ( RDR - i(t) ) * RC(t-1) ]
  2. ENI = Expected Net Income
    a) NB_ENI(t) = NB_BP(t)
    b) IFB_ENI(t) = IFB_BP(t) + ( i(t) * RC(t-1) )
  3. The expected (or target) amounts at the end of the period are the sum of the new business and in-force business amounts from the above formulas
    a) Targ IBV(t) = NB_EIBV(t) + IFB_EIBV(t)
    b) Targ NI(t) = NB_ENI(t) + IFB_ENI(t) = NB_BP(t) + IFB_BP(t) + ( i(t) * RC(t-1) )

EV: Practice and Theory, Page 21

26
Q

Approaches for Analyzing the Impact of Individual Assumptions on IBV and NI

A

(This is difficult because not all assumptions are independent. The basic approaches for dealing with the interaction of assumptions are):

  1. Independent assumption changes with model resets
    a) A modeled assumption is replaced with corresponding actual experience. The resulting change in IBV and NI is then attributed to that assumption.
    b) This is then done for each assumption individually, resetting the model before analyzing each assumption
    c) The sum of the above attributed changes will not equal the actual change in IBV and NI, so a residual change must be included in this analysis
  2. Stepwise assumption changes with no model resets
    a) Assumptions are again modeled one at a time. But the revised model is not reset after an assumption is analyzed.
    b) The impact assigned to subsequent assumption is only the additional impact caused by adding that assumption

EV: Practice and Theory, Page 23

27
Q

Formulas for Analyzing the Aggregate Contribution (AC) to Value

A
  1. AC(t) = ( AdjANW(t) - ANW(t-1) ) + ( IBV(t) - IBV(t-1) ) where AdjANW removes the impact of any investor cash flows during the period
  2. AC(t) is compared to aggregate expected contributions (EC) for a high-level analysis of change. The aggregate EC is the sum of the EC from new business, in-force business, and free surplus (see formulas from previous list)
  3. EC(t) = [ VNB(t) * ( 1 + RDR )^.5 ] + [ ( IBV(t-1) + RC(t-1) * RDR ] + [ FS(t-1) * i(t) ]

EV: Practice and Theory, Page 27

28
Q

Calculation of Effective EV Rate

A
  1. An effective EV rate can be calculated as a measure of value added expressed as a percentage
  2. Adjustments must be made for the value added by new business, so that the result is a return on in-force business only
  3. EffEVRate(t) = ( AC(t) - VNB(t) ) / ( EV(t-1) + 0.5 * VNB(t) )
    a) AC(t) represents the adjusted increase in EV during year t
    b) EV(t-1) = IBV(t-1) + ANW(t-1)
  4. The expected EV rate should be compared to expected RDR. If combined experience variations and prospective assumption changes produced a net decrease in value, the effective EV rate would be less than the RDR (and vice verse).

EV: Practice and Theory, Page 27

29
Q

Recommendation by the CFO Forum of Items to Disclose in EV Reporting

A
  1. Key Assumptions
  2. How key assumptions were determined
  3. Methodologies
  4. Reconciliation of opening to closing EV by source
  5. An analysis of the change in free surplus
  6. Sensitivities to key assumptions, including the impacts of the following:
    a) 100 basis point increase in the RDR
    b) 100 basis point reduction in the interest rate environment
    c) 10% decrease in equity or property values
    d) 100 basis point increase in yield on equities or property
    e) 10% decrease in maintenance expenses
    f) 10% decrease in lapse rates
    g) 5% decrease in mortality and morbidity rates

EV: Practice and Theory, Page 30

30
Q

Formulas for Calculating Embedded Value

A
  1. Cost of Capital = PV future tied capital releases minus increases + PV after-tax investment income earned on tied capital - tied capital
    a) the sum of the first two terms = PV capital cash flow
    b) Tied capital = capital at time 0 since the capital here is set equal to the Minimum Continuing Capital and Surplus Requirement (MCCSR) capital requirement for the block of business
    c) Cost of capital = PV capital cash flow - capital at time 0
  2. Embedded Value = PV Post-tax profits + cost of capital
    a) This is the block of business embedded value formula. (Note - In this study note’s example we cannot calculate the EV for the company as a whole since we are not told what free capital the company has. This formula uses a different approach to calculate EV, and the above calculates IBV but with the opposite sign used for cost of capital.

GHFV-133-19 Simplified EV example, Page 2

31
Q

Recommended Practices for Performing Actuarial Appraisals (ASOP #19)

A

(an Actuarial Appraisal is an appraisal of an insurance business presenting a set of actuarial appraisal values based on a range of discount rates and assumptions)

  1. When Setting Assumptions:
    a) Consider historical experience, adjusted for trend and known environmental changes
    b) Ensure that each set of assumptions used is internally consistent
    c) Consider the circumstances, needs, and strategies of the intended audience
  2. Consider displaying appraisal values using several discount rates
  3. Perform Valuation tests to determine whether the model reasonably reproduces results
  4. Address the sensitivities of the appraisal value to changes in key assumptions
  5. Provide documentation in sufficient detail that another actuary qualified in the same practice area can evaluate the reasonableness of the work.

ASOP #19, Page 3

32
Q

Items Included in an Actuarial Appraisal Report (ASOP #19)

A
  1. The scope of the assignment and any limitations as to the availability of data
  2. The Actuary’s Principal (client or ER)
  3. The duty, if any, that the actuary is assuming with respect to any user of the report other than the actuary’s principal
  4. A description of the intended use of the report
  5. A description of the business being valued
  6. The appraisal date
  7. An appraisal value or range of appraisal values
  8. The methodology used to develop the appraisal and reasons for the choice of methodology
  9. The projection model, the accounting basis used, and other key items included in the analysis
  10. The results of the model validation
  11. A discussion of the level of capital reflected in the appraisal and how this level was determined
  12. The assumptions, described in sufficient detain that another actuary qualified in the same practice area could evaluate their reasonableness
  13. The source of any assumption selected by someone other than the actuary
  14. The extent to which taxes have been considered and on what basis
  15. Any sensitivity testing results deemed material by the actuary
  16. The source and extent of reliance on information supplied by others
  17. Disclosures in accordance with ASOP #41 if applicable

ASOP #19, Page 5

33
Q

Formula for Distributable Cash Flow

A
  1. Distributable Cash Flow = After-Tax Earnings Minus Increase in Required Capital
    = Premium + Investment Income - Benefits - Expenses - Commissions - increase in Statutory Reserves - Taxes - Increase in Required Capital

Ch. 4 - Mergers and Acquisitions

34
Q

Criticisms of Embedded Value

A
  1. Susceptible to Manipulation - Based on assumptions or methods that outside observers do not fully understand
  2. Not useful for comparing performance across different companies since assumptions and methods differ
  3. Comparing EV over time within a company is also problematic if the observe doesn’t understand all changes

EV Paper

35
Q

Factors/Changes that could cause actual results to differ materially from expectations (Manulife EV Report)

A
  1. General Business and Economic Conditions
  2. Laws and Regulation
  3. Accounting Standards
  4. Regulatory Capital Requirements
  5. Ability to execute strategic plan
  6. Downgrades in Strength/credit rating of subsidiaries
  7. Reputation
  8. Provisions against future tax assets
  9. Morbidity, mortality, and policyholder behavior
  10. Methods for EV and NBV
  11. Hedging strategies/effectiveness
  12. Ability to source appropriate assets to liabilities
  13. Level of competition/consolidation
  14. Acquisitions
  15. Liquidity
  16. Obligations for additional collateral
  17. Availability of letters of credit
  18. Counterparty risk
  19. Reinsurance availability
  20. Legal and regulatory proceedings

Manulife

36
Q

Legal and Compliance Team Responsibilities during Due Dilligence

A

In the Course of Legal Due Diligence, the legal team will review:

  1. Corporate structure and ownership of subsidiaries
  2. Compliance with applicable laws
  3. The results from the most recent market conduct exam and financial examinations
  4. Compliance of products with statutory and tax requirements
  5. Compliance with laws with respect to giving or receiving credit for reinsurance
  6. Ownership of assets, including intellectual property and real property
  7. Employee liabilities

Ch 5. Mergers and Acquisitions

37
Q

Due Diligence - Review of Financial Statements

A
  1. Balance Sheet - Specific items that may be reviewed:
    a) Balance sheet items accuracy, completeness, compliance
    b) STAT, GAAP, and TAX reserve methodology
    c) Review potential conservatism of reserves
    d) Adjusted Net worth
  2. Income Statement and Management Metrics
    a) Patterns of Income Statement Items can reveal potential issues
    b) Consider fluctuations in earnings and nonrecurring adjustments
    c) GAAP, statutory, and internal management reporting should be checked
    d) Earnings analyses the seller uses to manage its business
    e) Review of management reports on earnings, and recent business plan projections
  3. Experience Reports
    a) These are the primary basis for assumptions in seller’s actuarial appraisal
    b) Experience reports drive key management metrics and explanation of earnings
    c) Seller’s experience should be compared to buyers
    d) Key areas of experience analysis include Mortality, morbidity lapses, and expenses

Ch. 5 Mergers and Acquisitions

Group Health Finance and Valuation (7 decks)

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