November 14th - 17th, 1999
Hyatt Regency Miami, Florida

Track 2 Getting Ready for a Merger or Acquisition

Pete Senak, P/C Actuary, Gerling Global Financial Products

Tuesday, November 16, 3:30 - 4:45 p.m.

"New Insurance Products Can Aid M&A Transactions"

Companies considering a merger or acquisition can also consider using use a host of new insurance products to make the deals go smoother, several insurance experts said.

Pete Senak, a property/casualty actuary with Gerling Global Financial Products, said companies involved in mergers are concerned about protecting their balance sheets against old liabilities, financing the project at the lowest rate possible and keeping taxes as low as possible.

Insurance products can address all three concerns, he said.

For instance, if Company A, the target of the acquisition, has $100 million in existing self-insured liabilities, then Company B, the acquiring company, wants to be sure those liabilities don't go any higher.

Company A can retain $50 million in liability, then buy a loss-reserve insurance policy. That's when an insurer assumes responsibility for the next $50 million layer of coverage plus 80% of the next $25 million in liability. Senak said an insurer wouldn't want to cover 100% of the next layer of liability because it's important for Company A to have some responsibility to keep the liabilities to under $100 million.

By buying the policy, Company A makes itself a better acquisition target, because Company B doesn't have to worry about liabilities being greater than expected. Also, the insurance premium brings a tax benefit to Company A.

Another innovative product is cash-flow insurance, Senak said. That's when an insurer guarantees revenue to a company over a set period. If the company falls short in a year, the insurer makes up 50% of the lost revenue. If the covered loss remains at the end of the period, the insurer can recoup losses from the company's future cash flows.

With a guaranteed cash flow, banks are more comfortable believing the debt will be paid and can reduce interest rates on debts, Senak said. It can also make the company a better acquisition target.

Senak cautioned against overindulging in such polices.

"Overuse of these products...can make today's numbers look better at the expense of future earnings," Senak said. "Some companies have gotten into trouble overusing these products."

Senak spoke Nov. 16 at the Ninth Annual World Captive and Alternative Risk Financing Forum.