Merger & Acquisition Consultancy

When companies merge or acquire, they retain attorneys and accountants to conduct the appropriate due diligence of the legal and financial condition of the target company. Often overlooked are the legal and financial implications for both companies’ insurance and risk management programs.

Our client, a tier 1 international automotive supplier with operations in several states and 9 countries, proposed acquiring a competitor and directed ColburnColburn to lead the due diligence related to the insurance and risk management programs.

An initial analysis of the insurance and risk management programs revealed the existence of a self-insured workers compensation program. Self-insured programs often create significant exposures to loss and financial liability. These programs must meet regulatory requirements, obtain letters of credit and recognize both current and future claim liabilities in their financial statements.

A thorough review of the financial statements revealed several issues of concern, including:

• The specific financial accounting recognition for workers compensations claims was set at $1,000,000 for the prior year
• Letters of credit outstanding in the amount of $500,000

The specific reserve of $1,000,000 of open liabilities seemed inadequate in light of the historical losses. Further analysis confirmed that the target company had based their financial reserves on the currently estimated workers compensation losses alone. There was no balance sheet recognition for the appropriate growth trending and development statistics. We worked with several insurance carriers to create a ten-year loss triangle to assist in the prediction of ultimate dollars to be paid on all incurred claims. Analysis of the data indicated potential ultimate losses of $3,000,000 to $5,000,000. Presented with this analysis, the target company’s insurance carrier and accounting counsel confirmed these projections and financial exposure. A potential $2,000,000 to $4,000,000 mistake was avoided.

These higher projected losses would significantly increase requirements for letters of credit on the workers compensation program going into run-off, requiring our client to tie up additional capital resources.

Understanding the implications of these unrecognized claim values and additional LOC requirements was instrumental in positioning our client to renegotiate the terms of the deal. This resulted in a significant and commensurate reduction of the purchase price.