case study- primus 97 insurance restructuring

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DELOITTE CASE STUDY

Insurance Business Restructuring



Team Details

Gaurav Gupta B.com (H) IInd Yr.

Jai Johar B.com (H) IInd Yr.Saurabh Goenka B.com (H) IIIrd Yr.

Smriti Khurana B.com (H) IIIrd Yr.

Surabhi Bajpai B.com (H) IIIrd Yr

Team Name:- Primus

Hans Raj College, Delhi University, DelhiOctober 13INSURANCE BUSINESS

RESTRUCTURING



IndexS.No. Contents Slide No.

1 CASE SUMMARY 5

2. PROBLEM(s) 6

3, DEFINING THE SCOPE OF STUDY 7

4. SOLUTION(s) 8

5. SOLUTION ADOPTED 9

6. REASONS FOR SOLUTION ADOPTED

6.1 SUMMARY 12-13

6.2 DATA ANALYSIS 14-26

6.3 OTHER KEY FACTORS 27-33

7. CONSIDERATIONS FOR OPERATIONAL SEPERATION PLAN 34-388. CORE GENERAL INSURANCE BUSINESS 39-41

9. APPENDIX 42-46

10. REFERENCES 47

11. APPROACH ADOPTED 48

12. LEARNING 49



Case Summary

Client : Insure Co , MNC insurance provider

Drop in profitability due to tightening of credit markets and

economic downturn

Refocus towards Core General Insurance Business

Divest business units in order to raise $3 billion

Potential business units : Life Line Asia & All World Life

Identification of suitable business unit for divestureOctober 13INSURANCE BUSINESS

RESTRUCTURING



Problem(s)

Insure Co has approached Deloitte to assess candidates for

divestiture and to develop a game plan for executing the

divestiture of selected business units.

Which company would you advise Insure Co to divest ? Pleaseuse available data to support your argument.

What are some of the other key factors that Insure Co should

consider when assessing which units to divest ?

October 13INSURANCE BUSINESSRESTRUCTURING



Defining the scope of study

Evaluation based on the basis of the given data. Ratio Analysis,

Net Profit Margin, Customer Analysis and other methods usedto come to the solutions possible.

Since, there is no precision in deciding which business unit todivest, as is recommended we have taken into accountEconomic factors and also did 4C’s and SWOT analysis for our

client InsureCo. Solution takes into perspective the long term scenario.

Solution also takes into account the factor considerationsapplicable post divesture of the suitable business unit

Insurance Penetration, Density, Age Analysis, GDP per CapitaGrowth rate in Asia and America done to come to the decisionof divestiture.

Guidelines for operational separation of the business units’operations from InsureCo provided with.




Solution(s)

1. Divestiture of All-World Life Insurance Business.

2. Assisting the client in Operational separation of the business

units’ operations from InsureCo.

3. Refocus on Core General Insurance Business

4. Raising $3B in Capital through sale of All-World Life and

several other business units.




Solution Adopted

DIVEST ALL-

WORLD LIFEINSURANCE

BUSINESS



REASONS FOR

SELECTING THIS

SOLUTION




SUMMARYOctober 13INSURANCE BUSINESS

RESTRUCTURING



Data Analysis

I. Growth Rate of Revenue, Net Income and Customer is stable in case of LifeLine Asia as compared to in case All-World Life where Growth Rate of

Net Income witnesses drastic reduction of 35%. The same pattern is seen

in Net Income/Customer Analysis of both the Companies.

II. The proportion of Net Income of LifeLine Asia to that of InsureCo is

more when compared to Proportion of Net Income of All-World Life.Similarly, the proportion of customers is also more in LifeLine Asia than

in All-World Life. It gives an hint that divestiture of All-World Life would

not impact operations of InsureCo as the divestiture of LifeLine would

do.




III. Revenue earned by LifeLine is far more than that earned by All-

World Life. While in Economic downturn, revenue is difficult to realize,

LifeLine Asia has done better in this aspect.

IV. LifeLine Asia’s positioning in Asia has improved the Net Profit

Margin of InsureCo’s business operations in Asia. It is more than

double that of North American counterparts. The fact that LifeLine Asiaaccounts for 1.76% of InsureCo’s Net Income while InsureCo earned

only 10% of its Net Income from Asia explains the importance of

LifeLine Asia in the Asian region. On the other hand All-World life

contributes mere 0.8% of InsureCo’s Net Income while InsureCo

realized 70% of its Net Income from North America.

V. We have analyzed Expenditure/Revenue of InsureCo on regional

basis and concluded that in North America, Expenditure is 96% of

Revenue while in Asia it is 90%

Data Analysis




Other Key Factors


I. Taking into consideration the Economic factors such as GDP per Capita

growth Rate, Demographic factors such as Ageing Population, TotalPopulation Growth rate etc and doing comparison among Asian and

American Economies, we have highlighted the importance of other key

factors in divestiture of All World Life.

II. By doing comparison on the basis of Insurance Penetration and Insurance

Density, assessment as to the maturity of Insurance Sectors in Markets canbe ascertained. Further, on that basis, growth of Insurance Industry in these

economies can be understood.

III. Asian Economy has done far better in comparison to US economy.

Growth Rate of Total Insurance Premium in Asia is 16.98% while in case of US

it is 2.32% highlighting the potential of Insurance Industry in Asia. While

Growth of GDP per Capita in Asia is around 7%, American Economy can be

thought of as slow growing economy with growth rate of around 2%.

IV. Interest Rate Fluctuations also play an important role in our analysis.

While Interest Rates in USA is very low signifying less return of Investment

for Insurance Companies, in case of Asia, Interest Rates are significantly

higher.



DATA

ANALYSIS




InsureCo

2009 2008 2007

Revenue($B) 25 30 28

Net

Income($B)

1.25 3 2.4

Customers

(thousands)(k)

750 800 700

GROWTH PATTERN

2008-09 2007-08

Revenue -17% 7%

NetIncome

-58% 25%

Customers -6% 14%




All-World Life

2009 2008 2007

Revenue($MM) 100 95 90

Net

Income($MM)

10 8 5

Customers

(thousands)

250 225 200

Growth Pattern

2008-09 2007-08

Revenue 5% 6%

Net Income 25% 60%

Customers 11% 13%




LifeLine Asia 2009 2008 2007

Revenue

($MM)

250 225 200

Net Income

($MM)

22 21 20

Customers

(thousands)

1100 1000 900

Growth Pattern

2008-09 2008-07

Revenue 11% 13%

Net Income 5% 5%

Customers 10% 11%




Qualitative DescriptionINSURE CO

Growth Rate in Revenue saw drastic reduction from 7% to -17% causingNet Income to decline from $2.4B in 2008 to $1.25B in 2009.

ALL WORLD LIFE

From 2007 to 2008 revenue increased at 6% , net income at 60% ,

customer base at 13% ,whereas from 2008 to 2009 revenue increased at arate of 5% , net income at 25% and customer base at 11% respectively. NetIncome witnessed a drastic reduction of 35% in growth rate from 2007-08to 2008-09.

LIFE LINE ASIA

Growth Rate of Revenue declined from 13% to 11%, while Growth Rate of Net Income remained constant at 5% implying reduction in expenditure.Growth rate of customer declined from 11% to 10% which is not significantwhen Growth rate of customer in All-World Life declined from 13% to 11%.




Net Income/Customer Analysis

Net Income/Customer($)

2009 2008 2007

ALL-World Life 40 35.5 25

Growth Rate 12.68% 42%

LifeLine Asia 20 21 22.22

Growth Rate -4.76% -5.49%

It can be clearly inferred from the analysis of above that the income per customer is

explicitly more in case of ALL-World Life but following are the implicit supporting points

for Life Line Asia:

•The proportion of customer is more in Life Line Asia which is in turn a very strong

positive point for long term perspective.

•On the basis of previous data, there is very strong declining rate in All World Life which

again overwhelms the mere point of better net income(which implicitly is not) per

customer.

•If we look at the declining growth rate of All-world Life, we can infer that owing to the

instability in the concerned unit the investor sentiments would be harmed.




Region Based Analysis

Revenue Net Income CustomersNorth America 80% 70% 60%

Europe 15% 20% 30%

Asia 5% 10% 10%

80%

15%

5%

Revenue

North America

Europe

Asia 70%

20%

10%

Net Income

North America

Europe

Asia60%

30%

10%

Customers

North America80% 70%

Europe 15%20%

Asia 5%10%

InferenceNet Income at 70% in North America , with 60% customer base , whereas incase of

Asia net income at 10% with 10% customer base. All-World Life contributes 0.8% of

Net Income to InsureCo, North America accounts for hefty 80% of Net Income of

InsureCo. LifeLine contributes 1.76% of Net Income to InsureCo’s Net Income and

Asia accounts for just 10% of Net Income of InsureCo



Net Profit Margin of InsureCo(Life Ins.)

The Net profit margin of Life Insurance Business’ in Asia is more than double that of in

North America. This number is an indication of how effective a company is at cost

control. The higher the net profit margin is, the more effective the company is at

converting revenue into actual profit. The net profit margin is a good way of comparingcompanies in the same industry.

2009

North America =437.5/10000*100

=4.375%1

Asia =62.5/625*100

=10%




Expenditure per Revenue Analysis

North America Europe Asia

Revenue(MM$) 10000* 1875 625

Expenditure(MM$) 9562.5 1750 562.5

Expenditure/Revenue*100 95.63% 93.33% 90.03

96%

4%

North America

Expenditure

Net Income

90%

10%Asia

Expenditure

Net Income

Inference

In North America 96% of Revenue is Expenditure whereas in Asia it is only 90%,

representing a lower pressure on Revenue from life insurance business.

*{(25000X80%)50%}




Qualitative Description

Life Insurance Operations of InsureCo in Asian region accounts

for 10% of Net Income of InsureCo. Net Income from LifeLineAsia contributes 1.76% of InsureCo’s Net Income. Role of LifeLine Asia in the Asian Region is significantly important.Consequentially. Proportion of Net Income realized from NorthAmerican operations is 70% of Net Income of InsureCo while

All-World Life contributes mere 0.8% to Net Income of InsureCo. Any positive development in Asian region also is alsoimportant on reciprocal basis. While Net Profit Margin fromAsian Life Insurance segment of InsureCo is 10%, in case of North American operations it is mere 4.375%.

In Asia, Expenditure per Revenue from Life Insurance business’ of InsureCo is 90% while it is 96% in case of North AmericanOperations of InsureCo




CONCLUSION

Profile : A U.S. – based life insurancebusiness , with $100M in annual revenues

Growth Pattern : From 2007 to 2008 revenueincreased at 6% , net income at 30% , customerbase at 13% ,whereas from 2008 to 2009revenue decreased at a rate of 5% , net income

at 25% and customer base at 11% respectively

Current year analysis : Net income percentagehighest in Asia at 23%

Region Based Analysis : Asian net income at 10%

with 10% customer base

Customer based analysis : The net incomeper consumer is $1.94 in case of Americaand $1.67 in case of Asia , which is roughlyon the same lines

1.94

1.11

1.67

North America

Europe Asia

Net income/customer

70%

20%

10%

Net IncomeNorth America

Europe

Asia

90%

10%

Asia

Expenditure

Net Income




OTHER KEY

FACTORS




Economic Outlook

USA ASIA

ECONOMIC GROWTH(GDP per Capita)

Slow growing economy(2%in 2011-10) making it

difficult to attract new

customers and retain

existing one

Emerging market , greatergrowth opportunity (7%)

REGULATION/LEGAL

COMPLIANCE

Looming Regulatory changes

pose challenges to Life

Insurers

Improved Regulatory

Systems. Regulations and

Legal Compliance still at pre-

mature level as compared to

USA

AGEING POPULATION (25-55

years)

Very Low Growth Rate.

Limited Opportunity

High Growth Rate. High

Potential for Insurers

PRODUCT INNOVATION Limited product innovation

and distribution system

Improved product

innovation and distribution

system



Insurance Outlook NORTH AMERICA ASIA

SUPERIOR UNDERWRITING

OF INSURANCE POLICIES

Austerity Measures limit

scope of writing new

insurance policies in coming

years

There will undoubtedly be a

dash by insurers to position

themselves to achieve

maximum penetration of the

growth in the Asian

insurance marketsTOTAL INSURANCE

PREMIUM

Growth of Insurance

Premiums was mere 2.32%

from 2009

Insurance Premium grew

16.98% in 2010 as economic

rebound in emerging

markets helped increase

Premium.

EARNING CAPACITY Persistent low interest rates ,

increased capital pressure

Limited capital pressure




Demographics

NORTH

AMERICA

ASIA

GDP RATE 2% 7%

POPULATION

GROWTH RATE

0.96% 1.8% - 2.2%

POPULATION(MM) 310 3002

INSURANCE PREMIUM

GROWTH RATE

2% 16%

LIFE INSURANCE

PREMIUM($MM)

506228 761970

AGE (25-55) for Year2010-15 0.15 6.28

THE DEMOGRAPHICS INDICATING A STRONGER GROWTH POTENTIAL IN THE ASIAN

REGION COMPARED TO UNITED STATES OF AMERICA , CLARIFY THE REASON TO

DIVEST ALL WORLD LIFE AND RETAIN LIFE LINE ASIA




Insurance Penetration

*Insurance penetration is calculated as the ratio of the percentage of total insurance premiums (in US dollars) to grossdomestic product.

There is a positive correlation between a country’s level of development and

insurance coverage. This is reflected both in the premium volume generated as a

percentage of GDP (insurance penetration) and in the premium per capita(insurance density.) Insurance penetration for USA stood at 8 per cent, whereas for

Asian markets the figure was 6.66 per cent. Indicating that more mature markets in

the region are saturated from an insurance penetration standpoint,




Insurance Density

*Insurance density is calculated as the ratio of total insurance premiums (in US dollars) to totalpopulation

This huge difference in densities gives some idea of the potential which different marketshave for growth. Asia’s below par Life Insurance Density of 246.30 is reached because of

extreme items-in case of Indonesia while it is 30.73, in Japan it is 3458.89. If we compare

emerging markets of Asia with USA, we can see that Emerging Markets of Asia have large

potential of growing whereas US Insurance Industry is near to saturation point

Comparison of insurance density (per capita insurance premium, US$)




Comparison

The slow-to-heal US economy has resulted in reducing net premiums for

property-casualty insurers, fostering declines in industry revenues and earnings.

Another major item that goes in favour of divesting US based Life Insurance

Business is interest rate fluctuations. Insurance companies invest much of the

collected premiums, so the income generated through investing activities is highly

dependent on interest rates. Declining interest rates usually equate to slower

investment income growth

In USA, interest rates are very low as compared to in Asia. Low interest rates

reduce the probability of people saving or putting capital into investment products

like life insurance and annuities

Looming regulatory changes pose strategic and competitive challenges to life andannuity insurers.

By 2015, approximately 39% of the world's economy is predicted to be in Asia-

Pacific




Implication of the Comparison The above comparison between Asia’s insurance industry and American Insurance

Industry has illustrated the following three points

I. The relative position of Asia’s insurance industry in the world market has ascendedto some extent, and the insurance industry in Asia is developing very fast.

II. The insurance premium per capita in Asia is still very low.

III. There is a large potential for insurance penetration into Asia’s economy.

In sum, we can conclude that the current Asia’s insurance industry is at a stagewhere it can be described as “fast growing, low level, large potential”. Demographicchanges in Asia, including an increase in aging and ailing populations, will help to

drive up the demand for Life Insurance products.

Going forward, the US Life Insurance industry confronts a climate of broadregulatory and economic uncertainty in the coming year and beyond.




CONSIDERATIONFOR

OPERATIONAL

SEPARATION

PLANOctober 13INSURANCE BUSINESS

RESTRUCTURING



4C’s Analysis of All-World Life

I. Community- PEST(Political, Economic, Social and Technological )Analysis

Economic Impact on Life Insurance Industry of InsureCo need to be taken care of.

Adherence to Regulatory Framework and Legal Compliance.

Fulfil obligations related to Corporate Social Responsibility

II. Competitor Foresee competitors reaction and likewise strengthen base of other Life Insurance

Business of InsureCo in North America.

III. Customer Meet expectations of customers of All-World Life. Maintain Customer faith in

InsureCoIV. Company Taxation Matters

Create a Divestiture Team

Proper utilization of resources retained and generated fundsOctober 13INSURANCE BUSINESS

RESTRUCTURING



4C’s Analysis of InsureCo

I. Community-

Protect Investor’s Interests.

Make best use of opportunity offered in terms of Demographics by Emerging

Economies.

Refocus on core general Insurance Business

II. Competitor Focus on delivering good quality Life Insurance products at competitive pricing.

III. Customer Maintain customer faith post All-World Life Divestiture

IV. Company Proper allocation of resource based on different economies.

Manage Investment portfolio prudentially.

Diversify into various Life Insurance Products and achieve high penetration rate.




SWOT Analysis of LifeLine Asia

Strength –Better market share

Weakness- Slow capitalization of potential in Asian markets.

Opportunity-Potential in Asian Market

Threat- Negative Impact of Economic downturn and

credit crisis in foreign markets.

It is suggested that with the inherent strength of the

concerned unit it can neutralize the threat.

Weakness on the other hand can be converted into itsstrength by formulating policies based on demographic

pattern of individual Asian economies.




Comprehensive Considerations

The transaction team is charged with meeting the expectations of all

constituents--employees, customers, stockholders, regulators, vendors and themedia--and should prepare a plan clearly delineating communication

benchmarks throughout the sale.

Corporate leaders must weigh an array of factors before they can make the

decision to divest. Chief among these is identifying business aims and weighingthe transaction's basic issues related to risk, legal, accounting, tax and

regulatory considerations.

The seller cannot reach its business goals for the deal unless a formal

transaction plan--a board- and management-supported blueprint that definesclear roles and responsibilities--is in place. The plan should be reviewed

throughout the transaction to measure progress against defined goals.




CORE GENERAL

INSURANCEBUSINESS




Quantitative factors

2009

3-yr Projected

Growth (CAGR)

Life 15% -3%

Property and

casualty 70% 6%

Long-term disability 15% 2%

2009

Life 50%

Property and casualty 10%

Long-term disability 40%

Industry Segment Overview Insurance Co Segment

Inference• CAGR highest in case Property and Casualty segment i.e. at 6 %

•Insurance Co segment lowest in case of Property and Casualty at 10%

•CAGR negative in case of Life at (3%)

•InsureCo segment in case of Life highest at 50%•InsureCo operated in 50% of LIFE Insurance Industry where 3-yr projected

growth is -3%. It should allocate its resources towards Property and Casualty

Insurance Segment where 6% growth is predicted on Compound three-year

basis.

The Insurance Co segment should focus into Property and Casualty andreduce its share in the Life insurance segment



Focus On General Insurance Business

The non-life insurance market in Asia is benefiting from an

increase in demand for property insurance.

Sluggish consumer and business spending similarly strains the

US property/casualty and life insurance segments, causing

revenues and earnings to fall in 2010. The decline in net

premiums occurred at the same time that investment yields

were torpid. Insurers are further pressured by a competitive

insurance market, with pricing barely budging in 2010 and no

expectations for significant movement in 2011.




APPENDIXOctober 13INSURANCE BUSINESS

RESTRUCTURING



Appendix http://www.census.gov/population/www/pop-profile/natproj.html

http://data.worldbank.org/indicator/NY.GNP.PCAP.CD http://www.economist.com/node/14515410

en.wikipedia.org

http://www.genevaassociation.org/pdf/News/2010GlobalInsuranceIndustryFactsheet-final.pdf

http://www.imf.org/external/pubs/ft/weo/2009/update/01

http://www.irdaindia.org/annual_handbook/Table%2026.%20Insurance%20Penetration%20and%20Density.xls

http://www.unctad.org/en/docs/ditctncd20074_en.pdf

http://data.worldbank.org/topic/financial-sector

http://articles.economictimes.indiatimes.com/2010-03-31/news/28382155_1_insurance-products-aviva-life-insurance-policies

http://elibrary-data.imf.org/DataReport.aspx?c=1449311&d=33061&e=169393

http://www.hsph.harvard.edu/pgda/WorkingPapers/2011/PGDA_WP_71.pdf http://www.alvarezandmarsal.com/en/industries/insurance/services/turnaround.aspx

http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_consulting_breakingupwithoutbreakingdown_082610.pdf

http://www.nytimes.com/1982/08/17/business/csx-divestiture.html

Joseph Stiglitz, Economics of the Public Sector.



Computation

Computation of Net Profit Margin of North

America in 2009

1250 (InsureCo’ Net Income $MM) X 50%(Life Ins.Segment) X 70%(North America)

=[437.5(Net Income from North America$MM)/10000(Revenue from North America $MM)] X100

Derivation of $10000MM

=>25000(InsureCo’ Revenue $MM) X 50%(Life Ins.Segment) X 80%(North America)

=10000




Growth of Insurance Premium

Source: Swiss Re, sigma, No. 2/2011.



Population Growth Rate- Age Group(25-55)

United Nations Population :World Population Prospects




References

1. Dr. Krishna Sachdev , Professor

Department Of Commerce , Hans Raj College

II. Rajesh Kumar Gupta, FCA

Partner, RAA & Co.




Approach Adopted

INFERENCE BASED SOLUTION

QUALITATIVE ANALYSIS + OTHER CONSIDERATIONS

EXPERTS , REFERENCES , INTERNET , RESEARCH PAPERS

IDENTIFICATION OF POSSIBLE AVENUES

DATA ANALYSIS (QUANTITATIVE ANALYSIS)

CASE STUDY GUIDELINE

UNDERSTANDING




Learning Brief introduction to the insurance industry

Data analysis

Qualitative analysis

Inference based solution

Client wants clear-cut solution.

Solution to a problem can be obtained only through brainstorming

discussions.

Proper Analysis and Interpretation is required.

No information is too much. Collect as many information as is

possible but do not let confusion creep in. Consolidation of information is essential.

Exposure to real business situations. Experience how

Tax/Management Consultants work. Understand experts role in

significant business events.October 13INSURANCE BUSINESS

RESTRUCTURING



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