Paying the Dues of Diligence

At a session examining the consolidation process, merging insurers were warned to perform proper due diligence before rushing to the altar. Ted Bossence, a partner in KPMG’s Insurance Industry practice, stresses the importance of following through with the proper diligence procedures before embarking on merger or acquisition plans. Bossence — along with a panel consisting of RBC Insurance Holdings chief financial officer Art Charow, executive vice president of General Accident Group Igal Mayer, Janet Wilson, a principal with KPMG’s Technology Management Consulting practice and John Jackson, a partner with KPMG’s National Benefits practice — told delegates that extensive and well thought out due diligence requires more than examining a company’s balance sheet.

Charow maintains companies should enter the due diligence stage with a clear and focused strategy encompassing several factors including:

Time to be allocated for the process;

The purpose for the acquisition;

The financial assumptions that are to be validated or invalidated;

The depth and complexity of the investigation;

A suitable location for the investigation;

The types of resources to be allocated and;

A clear set budget for due diligence.

Due diligence, says Charow, is not just a step that must be engaged in order to acquire a company, it must be an entire strategy campaign designed to identify a suitable acquisitional fit.

Intangible values

Due diligence should not be a priority for the buying entity alone, adds Mayer. He notes a company putting itself up for sale should create an information package for prospective buyers that not only focuses on the company’s cash value, but on other corporate values including information technology (IT) systems, products, distribution processes and human resource.

IT and human resource are two significant intangible considerations. Wilson notes that companies outsourcing significant aspects of IT and data systems are often unaware of the true value – and content – of the data. With today’s acquisitions motivated by increasing business volume, the significance of this information is not to be understated, she says.

Human resource is another intangible area which cannot often be translated into dollar terms but nonetheless affects the bottom line, says Jackson. However, with proper investigation, and exhaustive due diligence — which might include interviewing employees — both purchasing and selling companies can better gauge the true value of the transaction.

Continued consolidation

Judging from the heavy attendance at the due diligence session, companies believe full throttle acquisition activity will continue. At a plenary session earlier in the day, panelists examined the merger manic market, assessing its affects on small and medium-sized players and on the insurance buyer.

The plenary panel — which included Norm Foran, director of NN Financial, Dwight Lacey, chief executive officer of CIBC Insurance Companies, Doug Mackay, president of KPMG Corporate Finances, John Phelan, president of Munich Re, Jim Senn, deputy general manager of reinsurance for Manulife Financial and Bill Star, president of Kingsway Financial — agreed that high-level consolidation will force the small and medium-sized carriers to look for efficiency alternatives, including alliances and outsourcing, to compete with the big players achieving critical mass through acquisition.

Still, while outsourcing is utilized industry-wide to maintain fixed costs, the panelists suggest alliances are too difficult to negotiate between carriers. Lacey says a compromise to split profits and customer base are difficult to achieve. “When I first joined CIBC, we had conversations with many companies about forming alliances to deliver insurance products to the bank’s customers. Invariably, the breakdown came when it came to deciding who was going to get what split of profits as a result of doing the business,” he recalls.

Panelists also concur that continued consolidation could benefit consumers but that overwhelming consolidation, leading to a market mon- opolized by very few insurers will prove harmful. “There still needs to be more consolidation because there is over-capacity and there is still room for healthy competition in the industry. But if the consolidation gets to the point where there is dominance by one of the players . . . then I really can’t see any benefits at all for consumers,” Foran cautions.