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The Value and Price of an Intermediary

by Antonio D. Vila, FSA and Peter M. Wilson, CPA, FLMI

An abridged version of this article appeared in the Summer 2008 Actuarial Digest

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• Perform due diligence.  It is critical that your accounting, investment, actuarial, computer, administration and compliance experts do a thorough job of analysis to make sure that you are buying what you think you are buying.  It is as important to identify potential future litigation as it is to establish the value of assets and liabilities.

• Do the consolidations.  Most acquisitions contemplate back room and corporate function consolidation.  If that is the case, then the sooner it's done and over, the better.  The block acquisition will not payoff unless these consolidations are made.

If you are contemplating a divestiture we would recommend the following steps:

• Do a valuation.  Too often, companies try to save money by not doing a valuation before trying to sell a block of business.  A good valuation is critical to the seller because it (1) gives you an idea of what the block is worth, (2) serves as a selling tool for the block, and (3) provides a starting point for buyers to make bids.

• Hire one intermediary firm to handle the sale.  Unlike the acquisition side, you want no confusion in the marketplace as to who is authorized to sell your block.  This will maintain confidentiality, protect your agents, employees, and policyholders, and preserve the value of your block.

• Use a "rifle" approach.  Do not "shotgun" the block all over the market.  This will make prospective buyers think that there is something wrong with the block and most will shy away from bidding or even looking at the block.

• Pre-screen and qualify buyers.  This is the function of your intermediary.  The intermediary can screen and qualify buyers discreetly so that only interested and capable buyers know about your plans for a divestiture.

• Run a two step auction. This process helps separate the serious buyers from the "tire kickers.”  Request an initial nonbinding bid prior to due diligence.  Accept the best 5-7 bidders and allow them to perform due diligence and submit their final bid.

A commonality to the price of an acquisition or divestiture is usually a higher price to the buyer and a lower price to the seller.  Over the years it has been our experience that the “right price” for a block transaction has been when the buyer believes he is overpaying and the seller believes he is being underpaid.

The value and price of a direct writer's product reflects his assumptions, financial strength, long-term or short-term relationships and service capabilities.  The value and price of reinsurance reflects these same attributes of reinsurers and intermediaries subject to the demands of a competitive marketplace.

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