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Know the Facts: How Insurance Could Impact Your Tri-State M&A Deal
The Greater Cincinnati market is changing rapidly as a result of organic and acquisition growth. Many of our locally headquartered companies (Kroger, Community First Solutions, Heartland Bank) have become increasingly acquisitive in recent years and the area is primed for many more transactions to come.
Whether you are already involved in M&A activity or might be in the near future, it’s important to consider how insurance, risk management and employee benefits can impact the buyer and the seller.
Benefits and property and casualty insurance have a significant impact on all parties involved in the deal, as well as on the transaction itself.
Benefits
Buy-side: When it comes to employee benefits, a buyer should engage a due diligence provider to first assess the current state of the benefits program. This includes benchmarking (to industry/market for a platform or between buyer and seller for an add-on) premiums, employee/employer contributions, plan designs, lines of coverage offered and state of seller compliance (ERISA, IRS, DOL). A buyer should understand what benefits are in place today and how they can be improved to hire and retain key employees.
Further, the buy-side advisor should project what the plan costs could look like post-closing, considering factors such as:
- Will there be a significant shift in enrollment? For example, buyer plans are more favorable, therefore more seller employees may choose to enroll post-closing. The buyer should determine what their maximum liability will be if some or all the seller’s employees join their benefits plan. How much will the buyer’s risk be adjusted due to this influx of people on their benefits plan?
- Cost trend factors (health care inflation, claims trend, demographic data). What is the expected increase in cost over the next year? How does that impact the deal and the quality of earnings analysis?
The buyer should also understand through due diligence:
- Will there be a significant amount of disruption for seller employees through integration? If so, to what extent? Is the disruption enough to cause employees to leave the company, leaving the buyer with positions to fill in the near term?
- Is the seller in compliance with benefit laws and regulations?
Property and Casualty
Similar considerations exist for property and casualty insurance. A major concern buyers are facing today is the state of the primarily property market (P&C) and what assumptions need to be made relative to the insurance to accurately model pro forma costs.
Due diligence is the appropriate time to dive deeper into the commercial insurance plan and claims to determine the current and future state of the risk management programs.
Given current economic conditions, there is more scrutiny on due diligence by buyers to fully understand future costs and brace for any material increases that may be coming in the near-term post-closing. Some questions to ask relative to commercial insurance due diligence:
- Property: Have all properties been properly assessed and valued in the last three years? Are the appropriate coverages in place to protect the business today? Are there loss control programs in place that mitigate the risk of future claims?
- Casualty: Are the coverages in place adequately protecting the business? Are there safety and loss control programs in place that mitigate the risk of future claims?
- Cyber: Are there proper cyber controls and coverages in place today?
- Executive risk/management liability: Are the current directors, officers and management team adequately protected? Will the go-forward management team be adequately protected?
The experienced team at Oswald Companies can help you answer all these questions and more to ensure your deal moves forward and is successful. We will complete a benchmarking assessment in which we will provide modeling and projections for various scenarios.
This article also appeared on bizjournals.com.
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