2 Kay Carter: Solomon Harris Janet Hale: Alliant Insurance ServicesLisa Havens: Baylor Scott & White HealthJulie Robertson: Honigman Miller Schwartz and Cohn
3 IntroductionMerger and acquisition activity leads to need to evaluate, rationalize and consolidate insurance programsWe’ll be discussing considerations in doing so, from the perspective of the owner/insured and the insurance consultantWe’ll also address the tax and legal considerations in the structuring and implementation, from a U.S. perspective and a Cayman perspective
4 It Begins . . . . Analysis during due diligence phase Key items to be aware of before date of mergerWork after mergerAssemble the right team (integration team and service providers)
5 It Begins . . . . Begin the due diligence process Access materials already provided or preparedLooking forDifferences and similarities in programs (funding and reserving; insurance program structure; policy terms, processes, carriers)Potential areas of concern (tax; regulatory; disputes with insureds/owners (former/current), reinsurers; unfunded liabilities)Opportunities for efficiencies/cost savingsAddress any confidentiality/antitrust issuesDetermine the timelineWhat must be accomplished at close?How soon afterwards will there be a unified program?Objective: Determine whether to keep multiple captives or consolidate programs? And if consolidation, in what manner?
6 Keeping Multiple Captives Less commonMore costly to operateLess efficient from an administrative standpoint, even if captives are in same domicileMay be inconsistent with goals of integration at owner levelHarder to achieve savings in insurance costsBut may be usefulOne captive has liabilities the other doesn’t want to assumeOwner desires multiple vehicles for different purposesInsurance provided by geographic areaDifferent structures may be useful in future (e.g., cell captives, U.S./non U.S. captives/RRGs)Different allowable coverages in different domiciles (TRIA, punitive damages, ERISA benefits)One for taxable, one for tax-exempt riskIntent is to “spin-off” one part of the business in the futureMaintain relationships in multiple domicilesCannot obtain necessary consents to consolidation
7 For a Combination Preliminary considerations Domicile for survivor? Any segregated portfolio companies?Third party consents required?Tax considerationsNeed to understand tax status and positions of both captives CFC, PFIC, Non-CFC, Non-insurance company, U.S. corporation/953(d) election, pass-through entity / "check the box" election / IRS Form 8832)Conduct due diligence on state, federal, domicile tax mattersDetermine whether it’s possible to structure as tax-free reorganization under Section 368 of the U.S. Tax CodeConsult tax advisors early in process to ensure documentation supports tax treatment
8 For a CombinationOptions from a legal perspectiveLoss portfolio transferMerger or consolidation (Cayman or foreign law)Scheme of arrangement (Cayman law)Loss Portfolio Transfer (like asset/liability transfer)Transfer approved by captive boards and generally shareholdersRegulatory approvalThird party consentsSubsequent dissolutionGenerally takes less than three months (excluding dissolution)
9 Baylor Scott & White Health Resulted from the merger of two Texas based system, Baylor Health Care System and Scott & White, in 2013Baylor Health Care System, founded in 1903 and based in Dallas, TexasScott & White Healthcare, founded in 1897 and based in Temple, TexasBoth nonprofit systemsOver one year from the first announcement to the effective date of the merger
11 Baylor Scott & White Health Both had Cayman Islands captivesBaylor’s captive primarily was used as a pass through for reinsuranceScott & White’s captive retained risk and was used to write excess/access reinsuranceAfter the affiliation, looked to integrate programsDecision was not to keep two captivesThen had to decide: merger or consolidation?
12 Merger or Consolidation Merger: surviving company is a constituentConsolidation: consolidated company is a new companyProcedures are identicalGood standing and solventNo constitutional prohibition of merger or consolidationNo taintingConsent of secured creditorsAll regulators approveEffective DateFiling date or date up to 90 days later
13 Merger Procedure Authorisations and Consents Directors - approve merger and draft Plan of MergerShareholders - pass special resolution (unless vertical merger)If meeting, 2/3 of voting shareholders must passIf resolution in writing, must be passed unanimouslyAll regulator(s) must approve in principle/take no objectionAll secured creditors must consent; if not, may apply to Court to waive requirement
14 Merger Procedure Documents Required Special resolutionPlan of MergerDeclaration or affidavit of directorUndertakingFees
15 Merger Procedure Foreign Captives Declaration or affidavit by director of the Cayman surviving companyMay be the surviving companyIf so, cannot be against the public interest to permit the mergerNeed equivalent of Certificate of Good Standing from foreign registry/registriesCIMA may require evidence of good standing from foreign regulator(s)
16 Merger Procedure Filing Plan of Merger signed by a director of each constituent captiveCertificates of Good Standing for each constituent captiveDeclarations/Affidavits of director on behalf of each constituent captiveUndertakingLetters from regulator(s)Fees
17 Merger Procedure Dissenting Shareholders Dissenting shareholder entitled to be paid fair value of sharesMust follow procedure in Companies LawConstituent captive or surviving company obligated to offer to purchase dissenting shareholder’s sharesPurchase price must be paid to dissenting shareholder in cash
18 Scheme of Arrangement Can do merger or division Must apply to Grand CourtCourt may order a shareholder(s) meeting to considerDocuments required:Scheme of Arrangement (similar to Plan of Merger)Explanatory MemorandumPetition to commence actionAffidavit of directorApprovals of BoD and shareholder(s) (special resolution)Reporting affidavitApproval of regulator(s)Cost
19 Baylor Scott & White Healthcare Captives merged 7/1/14The wrinkle: also converted surviving company to segregated portfolio company“Onshore” education and governanceAssembling the new teamIntegrating the insurance programs
20 Key Risk Financing Issues Best Practice PerspectiveNo right way/ wrong wayOpportunity to “re-imagine” with changing healthcare environmentBlank Sheet of Paper ApproachResolution of VariancesCultureProgram StructureReinsurersVendorsMarketing a Consolidated ProgramObjective CriteriaSubjective CriteriaWhat potential markets want to knowManuscripting a New Policy FormKey Focus AreasChecklist Items
21 Best Practice Perspective Resist the tendency to pick one program over the otherUse as opportunity to totally re-evaluate risk as it relates to the new healthcare environment“Managed Care” activities“Financial Loss” TriggersJV’s/ AffiliationsResearchEmployed PhysiciansEbolaDetermine commonalities and variancesOpportunity to combine “best practices” of each merger partner
22 Resolution of Variances Chances are pretty good that you will NOT have the same expiration dates, same captive program structure, same tolerance of risk, same reinsurers, same exposures, and same vendorsCulture CheckDetermine the “risk philosophy” that promotes the strategies of the new organizationCompare/contrast current risk philosophiesBenchmarkingLeadership inputDifferences in Culture – how will they be resolved?
23 Broker ObjectivesDevelop a Risk Financing/ Insurance Program that supports the new Combined Entity Risk Profile;Move towards concurrency for all captive programs;Consolidate programs where there is consistency in program structure/ philosophy and a cost savings to do so;Keep parallel programs where it is advantageous to do so; andTake a “clean sheet of paper” approach to structure the best program for the new organization
24 Resolution of Variances Program Structure DecisionsPractical ConsiderationsWhat Risk is Assumed in the Captive?No risk assumed in the captiveTraditional GL/HPL/WC?Additional Lines/ retentions/ coinsurancePrior Acts – Included? Tail? LPT?CIMA in LoopTraditional or Integrated?Analyze optionsUse as opportunity to address new and emerging riskRetention/ Limit AnalysisDoes it make sense to assume more risk?What is the totality of risk across the enterprise?Tendency is to increase retentions on all lines of coverage – but need to evaluate losses that trigger multiple policiesPhysicians/ In or Out?Multiple Options need evaluationActuarial AnalysisConsolidate programs immediately or in future?*Consistent Coverage*Cost Reductions*Administrative EfficienciesNormally will not happen on DAY ONE (except D&O)Change in Control Provisions Need to be WaivedAssignment/ Notification of ReinsurersAdditional Insured Endorsements – new entitiesAgreement for pro rata cancellation if midterm consolidationCompare Reinsurance Certificate VariancesCan some commercial insurance policies be eliminated by rolling into the captive?Revisit separate commercial placementsSPC Structure – most flexibilityTail Options
25 Resolution of Variances Reinsurers DecisionsPractical ConsiderationsOverlap/ VariancesCompare reinsurance towersDepending on timing in the renewal cycle – may want to meet with lead reinsurers on integration strategiesDo reinsurers fit into new program structure?IntegrationPhysiciansCapacityLead Reinsurer AnalysisClaims philosophyHistorical relationshipCapacity for new entityReserving/ Claims PhilosophyContrast reporting requirements for each programDevelop consistent reporting procedures immediately and get reinsurer approvalContrast internal loss runs and develop a consistent approach and get reinsurer sign offSelected Date if Excess ConsolidationAdvise ReinsurersPro – Rata Cancellation or extension agreements
26 Resolution of Variances Vendors BrokersActuariesCaptive ManagersCaptive CounselAuditorsInvestments
27 Marketing a Consolidated Program Key IssuesPractical ConsiderationsObjective CriteriaStratified Loss InformationExposure Evaluation & ConsolidationPro-Forma FinancialsIntegration impact – employees, facilities, physicians, HR, patient safety, quality, etc.Subjective Criteria(Most Important)Senior LeadershipRelationshipStrategy/Vision for a Combined SystemFuture Acquisitions?Integration PlanWhat Underwriters Want to KnowSee Following List
28 Questions from Reinsurers Strategy/ VisionProvide an update on the vision for the integration – short and long term?Discuss the operating environment and business strategies for 2014 as a combined Health System.?Differences in culture? How are they being resolved?Senior Management/ Leadership Changes?Future Mergers/ Acquisitions?What strategies have been implemented or are in the process of being implemented to address healthcare reform?Research Dept. initiatives for the new organizationFinancialFinancial update and consolidation projections for YE 2014What is the 2015 financial outlook?Do you anticipate any capital spending in next 12 months due to the merger?Please discuss the current status of bonds, and the current amount outstanding. Are there any plans for additional bonds?Provide some color on financial challenges – government funding cuts, reimbursement issues, bad debt, decreasing patient volume, competition, etc.Legal/ RegulatoryDescribe new compliance & audit program structureDiscuss new Human Resource structure and how this will impact employeesUpdate on Texas Tort Reform – any expansion to outside TX jurisdictions?Please discuss any changes to retirement plans and integration of the separate health system plans.Describe any antitrust concerns with strategy/vision/future of organizationManaged Care/ ACO Exposure – general discussion on current ACO exposure, plans for future growth, etc.
29 Questions from Reinsurers Operational/Integration ProgressDescribe the integration of the overall delivery systemDiscussed how employed physicians will be handled within the new organizationComment on discussions with your healthcare providers in regards to integrating both health systems.What has been implemented with Medicare/Medicaid?Discuss how best practices from each organization have been incorporated into the new organizationDescribe IT and Back-office integration as well as respects protection of PHI – any cyber related concerns?Any significant cost reductions including employee layoffs within the next 12 months? Other cost-cutting initiatives?Updates on efforts for population health managementPatient safety / qualityEngaging physicians in improving the culture of quality/ programs implemented to addressRedesigning care processes – any new products, vendors, programs?Pay for Performance – ways to evaluate all stakeholdersRisk ManagementWhat has been accomplished in the first 100 days?What does the integrated Risk Management Dept. look like?Integration of PCE’s/Reporting – variances and plans to resolveReserving practices of the new organizationUpdate on combined loss historyRisk philosophy of the new organization - level of retained risk before excess attaches?What will the consolidated excess program structure look like?Uptick or any changes in lawsuit volume/ trends in lawsuit allegations?Update on Texas Regulatory Environment – any increase in federal/state/accreditation oversight and what initiatives are in place to handle?Medical necessity/ billing practices – checks and balances to help identify outlier/irregular billing patterns/ practices; how medical necessity is monitored; any adverse findings from DOJ investigations, etc.
30 Manuscripting a New Policy Form Focus AreasChecklistWho is an Insured?How are Partnerships/JV’s/Affiliations handled?How are Physicians covered?Consistent approach when not the majority ownerCoverage TriggersOf course GL/PL – but what about business practice exposure/financial loss/ E&O?Treatment of Managed CareEntities are now doing “managed care” activities that are not under a traditional Managed Care Organization (MCO)Re-evaluate this exposure and address either under a traditional MCO Policy – or under the primary/excess captive programBeware of MCO Exclusions on D&OTreatment of ResearchMeet with Research Depts. to evaluate the new entity’s approach to researchAviation RevisitedCheck Helicopter ContractsHelipad ExposureHangarkeeper’s Liability ExposureTreatment of Work Related InjuryOccupational Disease TriggersRethink Employer’s LiabilityPre-negotiate Tails6 year options
31 Lessons Learned/Recommendations Challenges:Getting the attention of the right people during a very busy, stressful timeTime consumingPolitics“That’s the way we’ve always done it”Success factors:A workplan to identify responsibility and key datesGood communications with decision makers, advisorsSenior leadership meeting with underwriters was very important