New Textbook Unveiled at CAS Spring Meeting
Insurance Industry Mergers and Acquisitions Available From SOA
By Alan Hines

I was gratified to be a panelist on the 2005 CAS Spring Meeting general session, "Insurance Industry Mergers and Acquisitions," and speak on the collaborative research effort, sponsored by the Society of Actuaries, to publish a textbook on this topic. The session panelists consisted of textbook contributors who shared their first-hand experiences of the critical roles actuaries assume throughout all phases of the M&A transaction.

Jim Toole, FSA, director of the life and health practice of MBA Actuaries Inc. and co-editor of the textbook, provided highlights of the two-year effort. "The impetus for the project was to eliminate the gaps in the actuarial syllabi on this very important topic and to enhance communications between the various professions involved in a transaction," Toole explained.

A unique added-value feature of the book is the collection of over 50 real-life anecdotes contributed by practitioners (affectionately know as "tales from the crypt") illustrating aspects of the text.

Two editors and ten authors contributed to the textbook. The authors included actuaries with specialties in life, health, employee benefits, and property and casualty disciplines-each with extensive M&A experience. The actuaries worked very closely with authors from other professions, including an investment banker, two CPAs, a lawyer, and a tax expert, with the goal to develop a resource for all phases of the acquisition from pre-marketing through closing and post-deal integration. Toole noted that there were more than 100 contributors to this effort, including individual writers, peer reviewers, and proofreaders. A unique added-value feature of the book is the collection of over 50 real-life anecdotes contributed by practitioners (affectionately know as "tales from the crypt") illustrating aspects of the text.

John Butler, senior vice president of Houlihan Lokey Howard and Zukin, an international investment banking firm, offered his view of the capital markets and the prospect for increased M&A activity for P&C insurance companies. "Recent underwriting results and the prospect of higher interest rates will create excess capital for P&C insurers. The capital markets will not reward companies who dividend their excess capital and there are only limited growth opportunities in the global insurance market," said Butler. "Therefore, we expect to see an increase in M&A activity in the P&C insurance industry during the next three to five years as these companies attempt to maintain their high returns."

Those attending the session were treated to the view of actuaries from an investment banker's eyes. Butler explained that the investment banker is involved in all aspects of the transaction. He gave an overview of the M&A process and how actuaries contribute during each phase. When a company is considering going to market, the investment banker should be the first person contacted since the initial presentation is critical to a successful deal. "When we represent the seller, one of the more challenging aspects of the engagement is working with the actuaries," said Butler. "The actuaries tend to be the ones who know the most about the company being sold." Butler added that actuaries usually enjoy talking about their work. "We work closely with the actuaries to ensure that the company's trade secrets are not disclosed during the due diligence and ensure that any inherent risks are presented in the appropriate context," said Butler.

I served as the CAS representative on the author group. During the session, I noted the differences between the roles of the life and P&C actuaries for insurance company valuations. For life companies, the actuarial appraisal is a key component in determining the purchase price, but for P&C companies an actuarial appraisal is not a staple among the material included in the data room. The CAS literature has excellent papers on insurance company valuation, yet many buyers are still relying on market multiple approaches to determine bid prices. I ventured to say that actuarial valuation models for P&C companies would gain wider acceptance as the new SFAS 141 accounting requirements for business combinations, which require companies to determine the value of renewals and other intangible assets, are put into place. I also noted that since investment bankers and others are relying on market multiples, it is imperative that the casualty actuary's reserve analysis consider quality of earnings adjustments related to changes in reserve adequacy and unusual claim activity.

The SOA textbook project was an excellent process for enhancing actuarial research. It challenges the CAS leadership to look for opportunities to sponsor a similar effort. I had always thought of myself as having a diverse background and broad perspective on all aspects of the deal. However, when we had our first meeting with the authors from the other disciplines, I quickly realized how focused my contributions have been. This project has tremendously expanded my understanding of the entire deal.

I would like to thank Wayne Blackburn, Gail Ross, Joy Schwartzmann, Christopher Walker, and the CAS Office for their help on the M&A textbook project.

The handouts from the Spring Meeting general session can be found in the Continuing Education section. Information on Insurance Industry Mergers & Acquisitions can be found in the Publications section of the SOA Web Site.

Alan Hines, FCAS, is a director with PricewaterhouseCoopers LLP in Boston.