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MERGER OF CAYMAN CAPTIVES. Kay Carter: Solomon Harris Janet Hale: Alliant Insurance Services Lisa Havens: Baylor Scott & White Health Julie Robertson:

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Presentation on theme: "MERGER OF CAYMAN CAPTIVES. Kay Carter: Solomon Harris Janet Hale: Alliant Insurance Services Lisa Havens: Baylor Scott & White Health Julie Robertson:"— Presentation transcript:

1 MERGER OF CAYMAN CAPTIVES

2 Kay Carter: Solomon Harris Janet Hale: Alliant Insurance Services Lisa Havens: Baylor Scott & White Health Julie Robertson: Honigman Miller Schwartz and Cohn

3 Introduction Merger and acquisition activity leads to need to evaluate, rationalize and consolidate insurance programs We’ll be discussing considerations in doing so, from the perspective of the owner/insured and the insurance consultant We’ll also address the tax and legal considerations in the structuring and implementation, from a U.S. perspective and a Cayman perspective 3

4 It Begins.... Analysis during due diligence phase Key items to be aware of before date of merger Work after merger Assemble the right team (integration team and service providers) 4

5 It Begins.... Begin the due diligence process – Access materials already provided or prepared – Looking for Differences 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 savings Address any confidentiality/antitrust issues Determine the timeline – What 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? 5

6 Keeping Multiple Captives Less common – More costly to operate – Less efficient from an administrative standpoint, even if captives are in same domicile – May be inconsistent with goals of integration at owner level – Harder to achieve savings in insurance costs But may be useful – One captive has liabilities the other doesn’t want to assume – Owner desires multiple vehicles for different purposes Insurance provided by geographic area Different 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 risk – Intent is to “spin-off” one part of the business in the future – Maintain relationships in multiple domiciles – Cannot obtain necessary consents to consolidation 6

7 For a Combination Preliminary considerations – Domicile for survivor? – Any segregated portfolio companies? – Third party consents required? Tax considerations – Need 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 matters – Determine whether it’s possible to structure as tax-free reorganization under Section 368 of the U.S. Tax Code – Consult tax advisors early in process to ensure documentation supports tax treatment 7

8 For a Combination Options from a legal perspective – Loss portfolio transfer – Merger 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 shareholders – Regulatory approval – Third party consents – Subsequent dissolution – Generally takes less than three months (excluding dissolution) 8

9 Baylor Scott & White Health Resulted from the merger of two Texas based system, Baylor Health Care System and Scott & White, in 2013 – Baylor Health Care System, founded in 1903 and based in Dallas, Texas – Scott & White Healthcare, founded in 1897 and based in Temple, Texas Both nonprofit systems Over one year from the first announcement to the effective date of the merger 9

10 Baylor Scott & White Health 10

11 Baylor Scott & White Health Both had Cayman Islands captives – Baylor’s captive primarily was used as a pass through for reinsurance – Scott & White’s captive retained risk and was used to write excess/access reinsurance After the affiliation, looked to integrate programs Decision was not to keep two captives Then had to decide: merger or consolidation? 11

12 Merger or Consolidation Merger: surviving company is a constituent Consolidation: consolidated company is a new company Procedures are identical – Good standing and solvent – No constitutional prohibition of merger or consolidation – No tainting – Consent of secured creditors – All regulators approve Effective Date – Filing date or date up to 90 days later 12

13 Merger Procedure Authorisations and Consents Directors - approve merger and draft Plan of Merger Shareholders - pass special resolution (unless vertical merger) – If meeting, 2/3 of voting shareholders must pass – If resolution in writing, must be passed unanimously All regulator(s) must approve in principle/take no objection All secured creditors must consent; if not, may apply to Court to waive requirement 13

14 Merger Procedure Documents Required Special resolution Plan of Merger Declaration or affidavit of director Undertaking Fees 14

15 Merger Procedure Foreign Captives Declaration or affidavit by director of the Cayman surviving company May be the surviving company If so, cannot be against the public interest to permit the merger Need equivalent of Certificate of Good Standing from foreign registry/registries CIMA may require evidence of good standing from foreign regulator(s) 15

16 Merger Procedure Filing Plan of Merger signed by a director of each constituent captive Certificates of Good Standing for each constituent captive Declarations/Affidavits of director on behalf of each constituent captive Undertaking Letters from regulator(s) Fees 16

17 Merger Procedure Dissenting Shareholders Dissenting shareholder entitled to be paid fair value of shares Must follow procedure in Companies Law Constituent captive or surviving company obligated to offer to purchase dissenting shareholder’s shares Purchase price must be paid to dissenting shareholder in cash 17

18 Scheme of Arrangement Can do merger or division Must apply to Grand Court Court may order a shareholder(s) meeting to consider Documents required: Scheme of Arrangement (similar to Plan of Merger) Explanatory Memorandum Petition to commence action Affidavit of director Approvals of BoD and shareholder(s) (special resolution) Reporting affidavit Approval of regulator(s) Cost 18

19 Baylor Scott & White Healthcare Captives merged 7/1/14 The wrinkle: also converted surviving company to segregated portfolio company “Onshore” education and governance Assembling the new team Integrating the insurance programs 19

20 Key Risk Financing Issues Best Practice Perspective No right way/ wrong way Opportunity to “re-imagine” with changing healthcare environment Blank Sheet of Paper Approach Resolution of Variances Culture Program Structure Reinsurers Vendors Marketing a Consolidated Program Objective Criteria Subjective Criteria What potential markets want to know Manuscripting a New Policy Form Key Focus Areas Checklist Items 20

21 Best Practice Perspective Resist the tendency to pick one program over the other Use as opportunity to totally re-evaluate risk as it relates to the new healthcare environment – “Managed Care” activities – “Financial Loss” Triggers – JV’s/ Affiliations – Research – Employed Physicians – Ebola Determine commonalities and variances Opportunity to combine “best practices” of each merger partner 21

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 vendors.... Culture Check – Determine the “risk philosophy” that promotes the strategies of the new organization Compare/contrast current risk philosophies Benchmarking Leadership input Differences in Culture – how will they be resolved? 22

23 Broker Objectives Develop 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; and Take a “clean sheet of paper” approach to structure the best program for the new organization 23

24 Resolution of Variances Program Structure 24 DecisionsPractical Considerations What Risk is Assumed in the Captive? No risk assumed in the captive Traditional GL/HPL/WC? Additional Lines/ retentions/ coinsurance Prior Acts – Included? Tail? LPT? CIMA in Loop Traditional or Integrated? Analyze options Use as opportunity to address new and emerging risk Retention/ Limit Analysis Does 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 policies Physicians/ In or Out? Multiple Options need evaluation Actuarial Analysis Consolidate programs immediately or in future? *Consistent Coverage *Cost Reductions *Administrative Efficiencies Normally will not happen on DAY ONE (except D&O) Change in Control Provisions Need to be Waived Assignment/ Notification of Reinsurers Additional Insured Endorsements – new entities Agreement for pro rata cancellation if midterm consolidation Compare Reinsurance Certificate Variances Can some commercial insurance policies be eliminated by rolling into the captive? Revisit separate commercial placements SPC Structure – most flexibility Tail Options

25 Resolution of Variances Reinsurers 25 DecisionsPractical Considerations Overlap/ Variances Compare reinsurance towers Depending on timing in the renewal cycle – may want to meet with lead reinsurers on integration strategies Do reinsurers fit into new program structure? Integration Physicians Capacity Lead Reinsurer Analysis Claims philosophy Historical relationship Capacity for new entity Reserving/ Claims Philosophy Contrast reporting requirements for each program Develop consistent reporting procedures immediately and get reinsurer approval Contrast internal loss runs and develop a consistent approach and get reinsurer sign off Selected Date if Excess Consolidation Advise Reinsurers Pro – Rata Cancellation or extension agreements

26 Resolution of Variances Vendors Vendors – Brokers – Actuaries – Captive Managers – Captive Counsel – Auditors – Investments 26

27 Marketing a Consolidated Program 27 Key IssuesPractical Considerations Objective Criteria Stratified Loss Information Exposure Evaluation & Consolidation Pro-Forma Financials Integration impact – employees, facilities, physicians, HR, patient safety, quality, etc. Subjective Criteria (Most Important) Senior Leadership Relationship Strategy/Vision for a Combined System Future Acquisitions? Integration Plan What Underwriters Want to Know See Following List

28 Questions from Reinsurers Strategy/ Vision Provide 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 organization Financial Financial update and consolidation projections for YE 2014 What 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/ Regulatory Describe new compliance & audit program structure Discuss new Human Resource structure and how this will impact employees Update 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 organization Managed Care/ ACO Exposure – general discussion on current ACO exposure, plans for future growth, etc. 28

29 Questions from Reinsurers Operational/Integration Progress Describe the integration of the overall delivery system Discussed how employed physicians will be handled within the new organization Comment 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 organization Describe 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 management Patient safety / quality – Engaging physicians in improving the culture of quality/ programs implemented to address – Redesigning care processes – any new products, vendors, programs? – Pay for Performance – ways to evaluate all stakeholders Risk Management What 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 resolve Reserving practices of the new organization Update on combined loss history Risk 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. 29

30 Manuscripting a New Policy Form 30 Focus AreasChecklist Who is an Insured? How are Partnerships/JV’s/Affiliations handled? How are Physicians covered? Consistent approach when not the majority owner Coverage Triggers Of course GL/PL – but what about business practice exposure/financial loss/ E&O? Treatment of Managed Care Entities 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 program Beware of MCO Exclusions on D&O Treatment of Research Meet with Research Depts. to evaluate the new entity’s approach to research Aviation Revisited Check Helicopter Contracts Helipad Exposure Hangarkeeper’s Liability Exposure Treatment of Work Related Injury Occupational Disease Triggers Rethink Employer’s Liability Pre-negotiate Tails 6 year options

31 Lessons Learned/Recommendations Challenges: – Getting the attention of the right people during a very busy, stressful time – Time consuming – Politics – “That’s the way we’ve always done it” Success factors: – A workplan to identify responsibility and key dates – Good communications with decision makers, advisors – Senior leadership meeting with underwriters was very important 31

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