Private Equity Insurance and Employee Benefits M&A Due Diligence

Navigating a Hardened Insurance Market and Socioeconomic Pressures

As the economy continues to experience shifts due to a global environment mired in uncertainty, mergers and acquisitions (M&As) continue in the middle market. Because of these challenges, it’s critical that during the M&A due diligence process, private equity firms not only examine the seller’s operational, legal, financial, and accounting records, but also its insurance program and employee benefits plan as early in the process as possible. Private equity firms also need to take a close look at insurance and benefits trends that may impact the deal. This enables you to properly determine the value of a potential new asset, uncover any possible risks that can negatively impact a company’s EBITDA, and protect against post-transaction liabilities.

Property & Casualty Insurance Due Diligence Process in M&A(s)

The Property & Casualty (P&C) due diligence process begins by working with an experienced M&A insurance broker to determine which of the target company’s risks are properly insured, underinsured, or not insured at all. We’ll ask to see all the seller’s P&C insurance policies – Commercial General Liability, Commercial Property, Environmental Liability, Directors & Officers (D&O), Errors & Omissions (E&O), Cyber Liability, Crime, Excess Liability, and any other policies the entity may have.

We’ll also ask for any information and records of policies dating as far back as possible, especially if the business is one that could be subject to long-tail liabilities. Long-tail liabilities are claims that can arise from incidents that occurred decades ago, such as asbestos contamination or sexual harassment.

Once we receive the policies, we initiate the vetting process, which includes the following (at a minimum):

  • Whether or not the policies are aligned with the operation’s risk profile
  • The named insureds on the policies (for example, should any subsidiaries be covered?)
  • Additional insured status of the seller on third-party agreements
  • Policy deductibles and retentions
  • The inclusion of policy “anti-assignment” or “change of control” clauses
  • Relevant policy exclusions
  • Claims history, pending claims, and/or potential claims that may erode policy limits in the future
  • Retroactive premiums associated with a policy
  • The availability of runoff or tail coverage to provide some coverage for pre-existing wrongful acts, occurring prior to the deal close

Upon completion of the policy review, we determine if any new additions and changes to the insurance program need to be implemented, depending on the merger or acquisition transaction structure and agreement language.

M&A

Today’s Hard Insurance Market and Your Due Diligence Process

After an assessment of a seller’s existing insurance policies, we will recommend any additional policies needed to address coverage gaps, with a keen eye on the state of today’s insurance market and the impact it may have on the transaction moving forward. Because of the current state of the insurance market, partnering with an experienced and well-connected team is critical in navigating challenges that are likely to arise while trying to place coverage.

The insurance market today is characterized by higher insurance premiums, tighter underwriting guidelines, reduced appetite for risk, and diminished capacity. This means that the current insurance costs of a business are likely not indicative of what they will be at the closing of an M&A deal. Any additional Management Liability policies that may need to be added at closing will likely also be hit by higher rates, as well as narrowing of coverage, reduced sub-limits, and increased retentions.

For example, according to the Council of Insurance Agents & Brokers, D&O renewal rates averaged a 15 percent quarterly increase from 1Q 2020 to 4Q 2021, with a 13 percent increase in 4Q 2021. According to Business Insurance, in 2021, Umbrella rates increased 10 percent to 20 percent with higher layers seeing increases of 25 percent to 30 percent. In 2022, Umbrella rates will likely stabilize and increase 10 percent to 15 percent, and Excess rates will rise 5 percent to 10 percent.

Though most parts of the country have reopened after the wake of the coronavirus pandemic, we’re continuing to see the economic aftershocks of this global phenomenon, which further strain an already hardened insurance market. Supply chain issues, extreme weather events, social inflation, labor shortages, cyberattacks, and economic inflation have come together at the same time to create layer upon layer of unpredictable risks for carriers. For investors, growing costs and interest rates reduce multiple expansion, limiting overall return rate for investments.

Cyber Security’s Growing Importance in Due Diligence

Since the coronavirus pandemic, instances of cyberattacks skyrocketed around the world for businesses of all sizes and in all industries. Unfortunately, this is a trend that shows no signs of slowing down. Businesses witnessed a 50 percent increase in attacks on a weekly basis in 2021 compared to 2020, and according to IBM’s Cost of a Data Breach Report 2021, the average total cost of a data breach increased to $4.24 million. Ransomware attacks are a prevalent issue, with the United States Treasury Department reporting that the average ransomware transaction per month in 2021 was $102.3 million.

While attacks on larger targets are those that make headlines, malicious actors are constantly on the lookout for anything that can make a potential target more vulnerable, regardless of its size. This is why ransomware groups have begun turning their attention to smaller targets in the middle of acquisition. They see newly acquired, midsize companies as easy targets for the picking with less of the geopolitical risk tied to attacking a large company.

Because M&As usually come with publicity, this is a signal to attackers that their target will soon have available funds that they can pursue. Additionally, part of the acquisition process includes the convergence of IT systems with the involved parties, and this transition can create cybersecurity vulnerabilities that attackers exploit. During the M&A process, involved parties are also probably preoccupied with a multitude of changes and thus less likely to stop an attack. Therefore, attackers see organizations involved in M&As as easier targets. Private equity firms that choose to ignore these trends and fail to prioritize cybersecurity are taking a risk that could be financially devastating.

This alarming trend has made cyber carriers even more stringent with the private equity risk they’re willing to take on. We’re seeing carriers ask for proof of cybersecurity measures for all parties involved in a transaction from day one. Carriers are less willing to offer coverage to companies who don’t already have the right cybersecurity measures in place before the M&A process even begins. This is why cybersecurity needs to be part of the baseline conversation in the diligence process. Our Private Equity team can help you navigate carrier requirements and implement missing security requirements, so you have financial protection from cyberattacks.

Employee Benefits Critical in Due Diligence

Seller Employee Benefits programs can often contain compliance or accounting issues that need attention. The seller should be able to provide you with all the necessary documentation about its Employee Benefits programs, including its retirement plan, health and insurance plan documents (Wrap Plan, Section 125, etc.), Form 5500s, policies and procedures, renewal schedules, contracts with service providers, and more. The seller should also provide information about Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) audits or other examinations that may have occurred in the past three years. After reviewing these documents, we can determine whether there is anything that may negatively impact you and determine a quick path to compliance before any transaction takes place. Special attention will be given to provisions concerning potential post-employment and post-sale liabilities.

For example, before the deal is finalized, the seller may need to follow the IRS’s correction program (the Employee Plans Compliance Resolution System) or the DOL’s correction program (the Voluntary Fiduciary Compliance Program or Delinquent Filer Voluntary Compliance Program). If a 401(k) is administered in-house, during the due diligence process we’ll also take a close look at the timeliness of plan contributions, the available investment options, and whether any match or profit-sharing contribution was improperly calculated and allocated. We’ll provide an analysis of the scope of any plan failures in terms of cost and time to resolve.

The Rising Costs of Benefits

Indications are that Employee Benefits costs are likely to rise in 2023 due to a return to delivering previously deferred non-COVID-19 care and a focus on building out robust benefits packages to attract and retain top candidates in the war for talent. In looking at a potential M&A deal, we’ll pay attention to the impact of offering a competitive benefits package on a seller’s health care spend, the benefits currently provided, and how these may shift moving forward.

Another driving force behind rising employer-sponsored health plan costs is the dramatic increase in the utilization of specialty prescriptions. While there is no silver bullet for specialty drug cost management, there are ways to bend the cost curve, sometimes with simple solutions, such as steering where the medications are delivered.  During the due diligence process, we’ll evaluate a seller’s total Rx spend, including the costs of specialty drugs, to determine how to manage formularies and claims pre-deal closing.

Ensure that Property and Casualty insurance and Employee Benefits due diligence are part of the M&A process to help protect against potential liabilities and bolster the value of the asset you’re considering acquiring. Involve your insurance advisor early in the deal process before any letter of intent is drawn so that potential issues can be addressed during the Representations and Warranties Insurance (RWI) process. In obtaining an RWI policy, the insurer will want to review the seller’s insurance and Employee Benefits programs.

This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.

DISCLAIMER

 

This material has been prepared for informational purposes only and was generated from information provided to BKS from the client and/or third-party sources. Therefore, BKS makes no warranty or representation(s) as to the accuracy or appropriateness of the data and/or the analysis herein. This information is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisors for those services.

2023’s Must-Have Employer’s Checklist for Open Enrollment

It’s almost that time of year again: open enrollment season.

Whether your company conducts open enrollment for health insurance benefits in September or December, now’s the time to start planning for a stress-free experience for both you and your employees.

For 2023, rising inflation is spurring a number of changes that you’ll likely have to deal with or consider, and you’ll have to communicate with employees about it. Potential changes include:

  • Increased contribution limits for health savings accounts
  • Higher minimum deductibles for high deductible health plans (HDHP)
  • Higher maximum amounts for out-of-pocket expenses for HDDPs

So where should you start? How can you stay on track? What can you do to ensure a complete and successful process? Experts suggest several practical steps to help you manage your timeline for planning and implementing your open enrollment process.

Use the following multi-point checklist as a guide:

business team working

PRE-PLANNING PHASE

Reflect on last year’s open enrollment campaign. Understand what went right, what could have gone better and, which, if any, process improvements you would like to make this year.

Review overall company goals with leadership for coming year. Confirm (or adjust) your benefits strategy to align with it.

Determine overall changes that may impact your 2023 benefits budget. This includes major shifts in your workforce and possible mergers and acquisitions, as well as new office locations that could impact or pose challenges for how you communicate key dates and activities or how you execute your open enrollment process this year.

PLANNING PHASE

 3+ MONTHS BEFORE YOUR OPEN ENROLLMENT DEADLINE

Survey various levels of your organization. Given that benefits are playing a very significant role in attracting and retaining talent, you may want to find out how satisfied employees are with your current healthcare options. Include questions that can probe for overall satisfaction with your offerings, carriers, and provider networks.

Analyze survey results and decide on action plan for addressing feedback.

­­Collect and compare benefits data from similar companies in your industry. Gauge your own company’s performance and look for potential opportunities to enhance your program.

Figure out how many employees are eligible for your benefits.

Coordinate, or work with your TPA to manage COBRA requirements for employees who experienced a qualifying event (e.g., job termination) during the year.

Communicate key dates for open enrollment with insurers and benefit providers so they can share information on their programs that you may need to pass on to your employees. Also, notify internal stakeholders, like payroll staff or finance department so they have ample time to prepare for their role in the process as well.

2+ MONTHS BEFORE

Evaluate health plans and renewal packages. Meet with your broker to review usage rates for current plans and discuss any new benefits you may want to offer such as telemedicine, fertility, FSA, and wellness programs. Compare details and pricing from your current carrier and other carriers on the market.

Review current HIPPAA, ACA, and other regulations so you can understand how any changes may impact benefit offerings to your employees.

Make 2023 benefits selections for your program.

2 MONTHS BEFORE

Work with your team to review the options prepared by you and your benefits broker and finalize selections. See what type of information and decision-making tools (e.g., info booklets, calculators, etc.) your broker can provide that can help employees during open enrollment.

Assign a main point of contact to handle any and all employee benefits questions during open enrollment.

Inform employees when your 2023 open enrollment period will begin. Include key dates for major activities they won’t want to miss, such as virtual events and onsite meetings.

IMPLEMENTATION PHASE

APPROXIMATELY 1+ MONTH BEFORE YOUR OPEN ENROLLMENT DEADLINE 

Roll out official employee communications program announcing the open enrollment period for 2023 benefits and share details. Use a variety of distribution channels, including emails, intranet, Teams, or Zoom to reach all employees.

As part of this effort: 

  • Update corporate calendar with important dates, events, and deadlines
  • Summarize changes to your existing plan options and update pricing
  • Announce any new offerings or programs
  • Remind employees that any life changes and health needs, such as major medical procedures, and dental work are variables they should consider when picking benefits
  • Provide descriptions and materials for plan options

Schedule temporary employees to help with added workload during open enrollment period. 

1 MONTH BEFORE

Begin sign up. Monitor activity with employees to ensure they elect or decline benefits before the deadline.

Communicate with employees about support hours, points of contact, and shared resources for getting answers to questions throughout the entire period.

Remind employees of due dates so they don’t forget to enroll.

Verify individual benefit selections, check for errors, and reach out to employees for corrections prior to submitting final forms.

2-3 WEEKS BEFORE

Submit approved selections along with the group application to benefit providers and health insurers.

Address any issues from your broker or benefits providers.

Follow up until everything is approved.

Managing your benefits strategy is pivotal in attracting and retaining talent in today’s competitive hiring market. Connect with our benefits team to learn how we can help you build the right program of offerings that differentiates you from the competition. Our team is here to provide the ongoing support and expert guidance you need to prepare for open enrollment.

Contact our Employee Benefits team.

business team working

DISCLAIMER

 

This material has been prepared for informational purposes only and was generated from information provided to BKS from the client and/or third-party sources. Therefore, BKS makes no warranty or representation(s) as to the accuracy or appropriateness of the data and/or the analysis herein. This information is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisors for those services.

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