Spotlight on the Nontraditional Actuary: Insurance Mergers and Acquisitions
The property-casualty insurance industry has seen considerable consolidation in the last couple of decades — and it seems that this wave of insurance mergers and acquisitions (M&A) is not about to stop. A number of companies are turning to M&A strategies to thrive under the pressures of the current mature market, low interest rates and catastrophes (among many other challenges). A number of recent deals come to mind: ACE’s purchase of Chubb; XL’s purchase of Catlin; Tokio Marine’s purchase of HCC; Arch’s purchase of AIG’s United Guaranty; the list goes on and on.
What you might not know is that in the midst of all this activity, there are actuaries playing key roles in the deal-making process.
Sean Satar, FCAS, is one such actuary with insight into the world of M&A. After graduating from the University of Toronto in 2010 with a degree in actuarial science, he joined Intact Financial Corporation (IFC) as an actuarial analyst in regional personal lines pricing. In 2015 he became a senior analyst in Corporate Development, the IFC team responsible for the company’s M&A activity. Satar is now an actuarial consultant at the IFC subsidiary, belairdirect. He joins Future Fellows for an interview to shed some light on how actuaries can contribute in an M&A role.
Future Fellows: So, what exactly are mergers and acquisitions in an insurance context?
Satar: Put simply, an insurance merger is two insurance companies being combined into a single company. Acquisitions are different: they involve one company purchasing another. Sometimes, the unit for sale is an entire company, including all of the policies, information and people. Other times, it could be just a selected unit of the company or a block of business that’s up for sale.
There are a lot of different reasons why a company may choose to make deals like this, but most often it’s to build economies of scale and diversify their portfolio. Scale is a pretty clear target for most companies, as it not only provides cost savings, but also gives an insurance company more ability to invest in the tools and services needed for a better consumer experience. Diversification is an important component to the success of insurance; M&A can help companies expand into areas more quickly (and sometimes more efficiently and effectively) than organic growth.
FF: Describe what your team did, and how you got into this role.
S: Intact’s Corporate Development team does what we would call in-house buy-side M&A work, meaning that we look specifically at opportunities for Intact to acquire other companies and portfolios, or form strategic partnerships. Our work would differ from sell-side and consulting roles.
Once we have a target in sight, we then determine what the value of a transaction is to our company through extensive research. We need to consider what value we can add and what synergies we can achieve if the acquisition is made. Our team needs to understand how both Intact and the target company work, and put together a plan and a valuation model to produce an offer — after which, negotiation becomes a big part of the job.
As for how I got this role, I guess I fell into it! At Intact, we really promote rotations for actuaries to try nontraditional roles. When the opportunity to join corporate development arose, I applied, got interviewed, and the rest is history. This kind of role is usually filled by people with more business-oriented backgrounds, but I think it just goes to show that companies are seeing the value of actuaries outside the traditional ratemaking and reserving roles. We look at things a little differently: We are quite data-driven and tend to approach problems more analytically than many other professionals.
FF: In your experience, what is the role of actuaries in M&A? Does having an actuarial background help you in this job?
S: I would say that my day-to-day has very little to do with what we normally consider actuarial work, but a lot of it is actually related to what we study. Through exams, we learn a lot about reserving, pricing, underwriting, claims and insurance law. This knowledge helped when I was building models to determine the value of a potential acquisition, taking into account the different possibilities of deal structure, the demands of the seller and, of course, the implications for our own company. Actuaries have a strong understanding of how all of an insurance company’s departments are interconnected, which helped me coordinate personnel and information from different departments to put a deal together.
If you look at a standard analyst working in M&A — maybe someone coming out of business school — they might need to learn about a lot of fundamental insurance concepts that we take for basic knowledge — an “earned premium,” for example. So off-the-bat, actuaries hit the ground running with our understanding of the intricacies of insurance operations.
Another advantage that I can think of is our understanding of reserves. In insurance M&A transactions, claim reserves are the biggest component of a company’s liabilities, so it’s key to value them properly in a deal.
FF: What is an aspect of M&A work that you really enjoy?
S: The best part of the job is that I get to work with so many different departments. When I’m researching a target or on a deal trying to close the agreement, I will often need to consult the experts from every department. It was so rewarding to learn from all of them, absorbing what they know and putting it into the context of what I needed in order to get to our common goal: closing the deal.
For example, our team works quite a lot with our in-house legal department. At the end of the day, legal is responsible for putting together the actual offer wordings, documents that can sometimes be legally binding. It’s extremely important that there is excellent communication among the legal team, our team and all other departments. Whatever we decide that we want from a business perspective needs to be translated into that final contract, and it needs to be precisely and correctly worded. At the same time, we need to ensure that what is written in the contract is what’s meant to be in there. Who would have ever thought that an actuary would be drafting sections and reading hundreds of pages of legal documents?
FF: Is there anything that you find challenging about your work?
S: I think this is a case where the most rewarding thing tends to also be the most challenging. Working in M&A, I had to be the jack-of-all- trades. In order to succeed, I had to understand what each department did and how everything came together operationally — at least enough to pick out the important details in the information that the departments provided and to use it for what I needed to work on the transaction. Anything you don’t know, you’ll learn on the job.
On top of understanding our own company, another challenge is that every potential target or partner is unique. Extensive research is required and, for the most part, there isn’t much time to do that. You will never get a truly complete picture, but it’s important to understand the other company well enough to properly valuate it. No two deals are identical, so you can’t apply the same model to every target. For example, some companies would have parents in different domiciles with different regulations; some might have different products in different regions; and some might report their data on vastly different bases.
I think when you build up your expertise about the core insurance terms and functions, then it gets easier and easier to extrapolate that from one company to another.
FF: Has your experience in M&A changed the way you work now that you have returned to a traditional actuarial role?
S: Yes. I think it gives me a unique perspective that really helps in my line of thinking and in the way I approach actuarial problems. I’ve improved my ability to coordinate with other teams and gain insights from experts in other departments. When you’re in actuarial, you tend to be pretty siloed. You can become very focused just working on your piece, and you do that because when you look that closely at the data, it can be easy to forget that there are a lot of operational considerations tied to what you analyze. Coming from a team where the focus is on the high-level, I found that my experience broadened my perspective and now allows me to approach problems from a different angle.
FF: One more thing…any words of advice for future actuaries who are interested in working in an M&A environment?
S: Always keep an open mind. It’s great to focus on studying when you are going through the exam process, but don’t forget that the workplace is a rich resource when it comes to learning about how an insurance company works. Go out and meet other people from your company who work in nonactuarial roles, find out what they do, and get their insights. Also, build a network of insurance professionals and mentors outside of your company. All these will help you build a more complete picture of an insurance business. That way, when you arrive in an M&A role, you can tackle your challenges with relative ease because you will have a variety of perspectives that you can leverage, as opposed to just the actuarial one.