Evaluating Captive Insurance Programs in M&A

In the standard private equity platform stock acquisition, the Seller’s “occurrence” policies (e.g. workers’ compensation, general liability and auto liability) are portable and can continue unchanged post-closing. But what if the Seller maintains these coverages in a captive such as a heterogenous or homogenous group captive?

In many cases the captive insurance can be portable with captive manager consent. However, we often advise against this and recommend excluding the captive from the transaction perimeter.

Driving this suggestion are the challenges of properly valuing the Seller’s captive equity position. Seller’s will often point to the amount on their equity statement, but captive managers typically exclude all incurred but not reported (IBNR) claims in this calculation.

Additionally, their methodology for loss development may be overly optimistic as they can later levy an assessment on the member if loss development is unfavorable. Collectively, this dynamic can lead a Seller to take the position that their equity value is higher than it is.

Rather than engage in the unnecessary negotiation, it may be more efficient to exclude the captive entirely and allow the Seller to keep all perceived equity – and all potential liabilities incurred as the captive is tailed off over five years.

Don’t let captive insurance uncertainties derail your acquisition. Schedule a consultation with our M&A insurance experts to explore the best approach for your transaction.