Case Study

Insurance business restructuring

Business Situation Our client, InsureCo, is a large, multi-national insurance provider, with revenues of over $25B in 2009. However, the tightening of the credit markets and downturn in the economy has caused their profitability to drop significantly from 10% to 5% in the most recent year. As a result of economic downturn, our client has decided to evaluate their business portfolio and divest portions of their business to raise capital and refocus on their core general insurance business. Their goal is to raise over $3B in capital through the sale of various business units. The management team has already identified two potential candidates for divestiture from its life insurance division. It is considering divesting one of the following business units, in addition to several other business across the company:

LifeLine Asia: Asian-based life insurance business, with $250MM in annual revenues All-World Life: A U.S.-based life insurance business, with $100MM in annual revenues

Deloitte Consulting LLP (Deloitte) has been engaged to identify and recommend the most viable business unit candidates for divestiture, as well as assist in the operational separation of the business units operations from InsureCo. Problem statement InsureCo has approached Deloitte to assess candidates for divestiture and to develop a game plan for executing the divestiture of selected business units
1. 2.

Which company would you advise InsureCo to divest? Please use available data to support your argument. What are some of the other key factors that InsureCo should consider when assessing which units to divest?

Insurance Business Restructuring

Copyright 2011 Deloitte Development LLC. All rights reserved.

Insurance business restructuring

Prompt Questions and Responses (For interviewer reference ONLY)
1. Which company would you advise InsureCo to divest? Which company would you advise InsureCo to divest? Please use available data to support your argument. (Note to interviewer: Please provide candidate with data sheet) A good answer will draw the following conclusions from the data provided: Both companies revenues are increasing but the profitability of LifeLine Asia is deteriorating while All-World Life is improving Both companies appear to be gaining more customers but All-World Lifes customers are significantly larger than LifeLine Asia InsureCo is more profitable in Europe and Asia than North America InsureCo has been losing its high-grossing customers, in terms of revenue and profit Industry trends indicate that InsureCo focus on long-term disability and property and casualty going forward InsureCo concentrates on life and long-term disability insurance but not in property and casualty insurance After this analysis the candidate should make an argument for either of the two companies, the interviewer should grade the candidate on whether the conclusion, drawn from the data makes sense. At a high level, conclusions could be: For All-World Life LifeLine Asia topline is growing but less profitably and would therefore be more difficult to sell All-World profit margin continues to improve year over year Large customers will help acquirer be laser focused on retaining the book of business for each one For Life Line Asia LifeLine is 2.5 times the size in terms of revenue and 2.2 times in terms of profit so would run a higher valuation The large number of customers may indicate that there is significant room to penetrate each customer and grow those accounts Asia seems to be more profitable overall for InsureCo A great answer will include the items above, but also synthesize findings across tables. Some findings includes: InsureCo is more profitable in Europe and Asia although LifeLine Asia is not displaying those characteristics InsureCo should consider getting out of the life insurance area and increase the size of their long-term disability Although not a huge part of their business today, InsureCo could cross-sell property and casualty products to existing customers. Since property and casualty has the highest growth rate and largest market size overall. The companies in this case are a very small part of InsureCo. The client should consider divesting bigger companies; this will decrease the complexity of managing all the individual transactions The candidate may suggest that this is not the best time to sell the life insurance companies and InsureCo may want to divest a company in property and casualty or long-term disability. Industry outlook is poor in life insurance, so InsureCos life insurance companies may be undervalued at this time.

Insurance Business Restructuring

Copyright 2011 Deloitte Development LLC. All rights reserved.

Insurance business restructuring data sheet

LifeLine Asia
2009
Revenue ($MM) Net income ($MM) Customers (thousands)

All-World Life
2007 2009
Revenue ($MM) Net income ($MM) Customers (thousands)

2008

2008

2007

250 22 1,100

225 21 1,000
InsureCo

200 20 900

100 10 250

95 8 225

90 5 200

InsureCo geographies (2009)

2007 Revenue
North America Europe Asia

2009
Revenue ($B) Net Income ($B) Customers (thousands)(K)

2008

Net Income

Customers

25 1.25 750

30 3 800

28 2.4 700

80% 15% 5%

70% 20% 10%

60% 30% 10%

Industry segment overview

2009
Life Property and casualty Long-term disability

InsuranceCo segment overview

2009
Life Property and casualty Long-term disability

3-yr Projected Growth (CAGR

15% 70% 15%

-3% 6% 2%

50% 10% 40%

Insurance Business Restructuring

Copyright 2011 Deloitte Development LLC. All rights reserved.

Insurance Business Restructuring

Prompt Questions and Responses (For interviewer reference ONLY)
2. What are some of the other key factors that InsureCo should consider when assessing which units to divest? A good answer will be logically structured to address various business considerations including: Overall culture/people impact : Selling off the highest quality assets can disrupt the employee base and change the overall image of the company and cultural underpinnings. Considerations should also be made around how to retain key talent at the remaining company. If certain employees in the divested business are being groomed for executive positions at the corporate parent, measures need to be taken to retain these individuals. Geographic reach/overlap: Considerations should be made to determine where the company has overlap in various geographies and product mixes. Impact to remaining revenue streams: Candidates should explore the impact to that a divested business unit will have on the portions of the business that remain. For example, if other insurance and investment products are cross-sold at a life insurance business unit that is being sold, the company needs to assess the potential loss in revenue. Potential buyers: Who are the prospective buyers for the business and what are the potential issues with making a deal with each one? If any of these business are being spun out into separate companies (via initial public offering), legal and regulatory considerations must be made.

A great answer will include the items above, but also explore the impact of information technology (IT) and key technology systems and infrastructure. Many business units are dependent upon corporate IT systems for support and running the business. The corporate parent will need to consider the level of effort to fully separate these business units, as well as if the divesting business own key systems that will be required by the parent post-divestiture.

Insurance Business Restructuring

Copyright 2011 Deloitte Development LLC. All rights reserved.

Insurance business restructuring

Wrap Up
Companies frequently look to merger and acquisition activity as a way to accelerate their growth, but divestitures can also be an effective tool to help businesses sharpen their focus and use proceeds to invest in high-growth areas. In this situation, Deloitte was brought in to help the client with an efficient, accelerated divestiture of a number of business units. The Deloitte team assisted the client by: Creating a robust divestiture process Expediting and aligning the planning process with separation blueprints, day one readiness plans, and exit plans Execution of issue-free day one for numerous divested business units and successful day two Deloitte is viewed as a trusted advisor to the client and has conducted numerous project to help the client transform their business operations

Insurance Business Restructuring

Copyright 2011 Deloitte Development LLC. All rights reserved.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited