Transactions and insurance capital markets

We provide actuarial analysis of and advice on insurance M&A transactions, reinsurance transfers, capital relief and restructuring (reinsurance and capital markets), rehabilitation, and post-merger integration. This includes M&A due diligence, appraisal analysis, PGAAP, and opening balance sheet scrubs; analysis of securitizations, captive solutions, and collateral reduction strategies; and analysis of longevity and pension risk transfer transactions.

Our solutions are focused on addressing the concerns of insurance companies, including:

Due diligence and restructuring

Both corporate and private equity players are thinking about insurance-related transactions to expand market share, diversify revenue streams, and fuel their long-term strategic plans. Successful deal making requires a focus on the relationship between risk and return. However, some potential "blind spots" can threaten your probability of realizing expected value from an insurance acquisition. Understanding the nuances of the complex, highly regulated insurance marketplace and its products, risks, and accounting requirements are paramount to ensuring the successful execution of an insurance acquisition.

Potential issues

  • Determining what transaction structure is optimal for a particular M&A deal (stock purchase, asset sale, merger, or reinsurance) is complex and outside objectivity is necessary
  • Assistance is necessary to evaluate whether a target company is right from a product rationale standpoint and what the downside risks are
  • A lack of or limited Board understanding of the accounting implications post-transaction
  • Improper statutory reserving for contracts or reinsurance contracts resulting in larger than priced for capital requirements
  • Aggressive appraisal assumptions increase the downside risk of being able to achieve target ROI
  • Emerging risks can potentially change the dynamics of a proposed deal

How we can help

  • Enhance the quality of financial reporting to increase management and shareholder confidence in acquisition considerations
  • Offer proactive resolution of issues – coupled with a deep understanding of technical accounting, income tax impacts, financial market expectations, corporate governance, and rating agency and regulatory concerns – to preserve the value of your business
  • Analyze appraisals and assumptions used for appraisals to ensure that transactions return the cost of capital and don’t negatively affect shareholder value
  • Analyze contractual benefits and limitations on benefits for impact on required capital

Our services

  • Proposed transaction strategic rationale evaluation
  • Financial due diligence of appraisal cash flows, assumptions, methodology, and results
  • Financial due diligence of liabilities
  • PGAAP balance sheet development
  • Risk management framework establishment, including governance and organization, measurement and analytics, reporting, systems and data infrastructure

Capital restructuring

Capital restructuring can make a business more capital efficient as such a financial management tactic typically decreases expenses, improves operational effectiveness, raises earnings per share, and provides a foundation for better overall operational results. As such, insurers are continuously looking to alter their capital structure in response to changing business, economic, or regulatory conditions, or as a means to fund growth plans. Finding the right balance between sources of capital, regulatory compliance, financial structuring, and optimal shareholder return is a complex objective that presents significant challenges.

Potential issues

  • Redundant capital (e.g., holding reserves for XXX or AXXX business) is inhibiting growth and/or compromising liquidity
  • There is a need for a deeper understanding of how to better match assets and liabilities for your variable annuity business

How we can help

  • Reduce costs and increase premium stability
  • Offer direct access to reinsurers to increase capacity and balance sources of capital with regulatory compliance and optimal shareholder return
  • Identify broader or otherwise unavailable coverage to support business growth
  • Assist with the recapture of investment income to fund business goals
  • Identify insurance accounting benefits: deductible reserves, deductible premiums (in some cases), deferred taxes of considered restructuring options

Our services

  • Captive structure establishment
  • Evaluation of risk transfer requirements
  • Cost/benefit analysis for optimal risk transfer structure
  • Due diligence of captive structures

Longevity

Biometric longevity risk exposures have increased significantly as new structured products and hedge indices carve out the longevity risk. In addition, while the risk exposure at the retirement and old ages continues to increase significantly, the original assumptions set at those ages were often flawed and based on limited experience.

As new regulations and structured products emerge, it continues to be important for managers to assess the longevity risk exposure and determine where there are strengths and weaknesses in those assumptions. Managers need to assess both reinsurance and capital market products when managing longevity risks as well as assess and mitigate longevity arbitrage risks created via the capital markets.

Potential issues

  • A limited capability to evaluate mortality experience and medical underwriting criteria to determine expected mortality and mortality improvement levels for structured products
  • An absence of or limited number of services/products to help manage longevity risk exposure
  • Elevated levels of longevity arbitrage risk, coupled with a limited ability to assess the basis or arbitrage risk between demographic groups or counterparties, exist

How we can help

  • Determine risk analysis of longevity exposure and establish efficient risk and financial management strategies for mitigating longevity risk or leveraging the longevity capital markets
  • Evaluate your product development to ensure assumptions are not set at outdated older ages and that pricing is accurate
  • Help you respond adequately to expectations to securitize, hedge, or arbitrage the insurance market to address capital market expectations

Our services

  • Longevity analysis and portfolio modeling
  • Due diligence of risk management solutions
  • Identification of optimal capital market structures
  • Results volatility simulations

Pension risk transfer

With people living longer and time spent in retirement increasing, insurers are grappling with unprecedented economic pressure to meet their pension obligations and manage risk. Pension risk management has traditionally focused on managing plan design, asset, and ALM risks. However, the mitigation of these risks has also amplified the exposure to liability risks, chiefly the risks of longevity and demographic shifts.

Insurers’ growing awareness of investor concern over funding status and a company’s economic health has led them to evaluate their pension risk in light of funding costs and options, increasing Board interest in pension risk management, and regulatory change.

Companies are now executing holistic and unbundled approaches with insurance solution providers. These solutions can dramatically mitigate not just liability risks but also interest rate, inflation, and equity risks.

Potential issues

  • Additional knowledge of current range of liability risk exposure is required
  • Board information requirements and action plans regarding current funding status, coupled with the current and future potential economic and regulatory outcomes, need clarity
  • A lack of adequate knowledge of which risk management strategies are available, and what the cash, accounting, and tax consequences are, exists
  • Risk management strategy related to liabilities is not a best fit

How we can help

  • Establish financially effective and risk- and tax-efficient strategies to manage plan sponsor and insurance company needs
  • Assess and account for potential funding shortfalls and develop mitigation strategies
  • Evaluate your risk management strategy, including exposure to liability risks, to address fair value accounting standards and ensure compliance

Our services

  • Longevity analysis and portfolio modeling
  • Due diligence of risk management solutions
  • Identification of optimal structures
  • Strategy analysis and implementation support

Transfer pricing

Intercompany transactions across borders are growing rapidly and are becoming much more complex. Compliance with the differing requirements of multiple overlapping tax jurisdictions is a complicated and time-consuming task, especially as it relates to today’s transfer pricing rules. Multinational organizations are navigating operations in an ever-expanding globalized world, and the increasing, diverse transfer pricing requirements they face are daunting. At the same time, tax authorities from each country are imposing stricter penalties, establishing new documentation requirements and more stringent information exchange requirements, and are increasing audit/inspection activity.

This intense scrutiny imposes significant risks, particularly in a complex field such as transfer pricing, where each transaction must be analyzed under its own unique facts and circumstances. Insurance businesses can be particularly challenging given the expertise required to properly evaluate the risks and potential pitfalls of risk transfer.

Potential issues

  • Transfer pricing documentation is required in multiple jurisdictions
  • A limited ability to develop an actuarial appraisal model that complies with the arm’s-length principle underpinning transfer pricing guidelines
  • Optimal management of worldwide transfer pricing policies and procedures is needed
  • Failure to demonstrate adequate procedures may result/is resulting in IRS fines

How we can help

  • Minimize expensive duplication of data collection efforts and transfer pricing reports that are inconsistent with the global needs of the company
  • Ensure your tax department is able to evaluate and manage new and stricter transfer pricing documentation requirements to withstand tax authority scrutiny and avoid penalties
  • Establish a robust framework for producing the documentation required to defend transfer pricing data
  • Price intercompany reinsurance transactions consistent with the arm's-length standard

Our services

  • Actuarial appraisal basis establishment, including benchmarking of inputs, calculations, and results against independent third-party market participants
  • Transfer pricing checklist development to facilitate compliance with IRC § 6662
  • Transfer pricing report development