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, Delhi

INSURANCE BUSINESS RESTRUCTURING October 13

Index
S.No. Contents Slide No.

1
2. 3, 4. 5. 6. 6.1 6.2 6.3 7. 8. 9.

CASE SUMMARY
PROBLEM(s) DEFINING THE SCOPE OF STUDY SOLUTION(s) SOLUTION ADOPTED REASONS FOR SOLUTION ADOPTED SUMMARY DATA ANALYSIS OTHER KEY FACTORS CONSIDERATIONS FOR OPERATIONAL SEPERATION PLAN CORE GENERAL INSURANCE BUSINESS APPENDIX

5
6 7 8 9 12-13 14-26 27-33 34-38 39-41 42-46

10.
11. 12.

REFERENCES
APPROACH ADOPTED LEARNING

47
48 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 divesture
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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 ? Please use 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 ?

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Defining the scope of study

Evaluation based on the basis of the given data. Ratio Analysis, Net Profit Margin, Customer Analysis and other methods used to come to the solutions possible. Since, there is no precision in deciding which business unit to divest, as is recommended we have taken into account Economic factors and also did 4Cs and SWOT analysis for our client InsureCo. Solution takes into perspective the long term scenario. Solution also takes into account the factor considerations applicable post divesture of the suitable business unit Insurance Penetration, Density, Age Analysis, GDP per Capita Growth rate in Asia and America done to come to the decision of divestiture. Guidelines for operational separation of the business units operations from InsureCo provided with.
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Solution(s)
1.

Divestiture of All-World Life Insurance Business.

2.

Assisting the client in Operational separation of the business units operations from InsureCo. Refocus on Core General Insurance Business
Raising $3B in Capital through sale of All-World Life and several other business units.

3.

4.

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Solution Adopted

DIVEST ALLWORLD LIFE INSURANCE BUSINESS

REASONS FOR SELECTING THIS SOLUTION

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SUMMARY
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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.

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Data Analysis
III. Revenue earned by LifeLine is far more than that earned by AllWorld Life. While in Economic downturn, revenue is difficult to realize, LifeLine Asia has done better in this aspect. IV. LifeLine Asias positioning in Asia has improved the Net Profit Margin of InsureCos business operations in Asia. It is more than double that of North American counterparts. The fact that LifeLine Asia accounts for 1.76% of InsureCos 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 InsureCos 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%
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Other Key Factors

I. Taking into consideration the Economic factors such as GDP per Capita growth Rate, Demographic factors such as Ageing Population, Total Population 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 can be 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 INSURANCE BUSINESS October 13 higher.
RESTRUCTURING

DATA ANALYSIS
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InsureCo
2009 Revenue($B) Net Income($B) Customers (thousands)(k) 25 1.25 750 2008 30 3 800 2007 28 2.4 700

GROWTH PATTERN
2008-09 2007-08 Revenue Net Income Customers -17% -58% -6% 7% 25% 14%

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All-World Life
2009 Revenue($MM) Net Income($MM) Customers (thousands) 100 10 250 2008 95 8 225 2007 90 5 200

Growth Pattern
2008-09 Revenue Net Income Customers 5% 25% 11% 2007-08 6% 60% 13%

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LifeLine Asia
2009 Revenue ($MM) Net Income ($MM) 250 22 2008 225 21 2007 200 20

Customers (thousands) Growth Pattern

1100

1000

900

2008-09 2008-07 Revenue Net Income Customers 11% 5% 10% 13% 5% 11%

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Qualitative Description
INSURE CO Growth Rate in Revenue saw drastic reduction from 7% to -17% causing Net 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 a rate of 5% , net income at 25% and customer base at 11% respectively. Net Income witnessed a drastic reduction of 35% in growth rate from 2007-08 to 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 significant when Growth rate of customer in All-World Life declined from 13% to 11%.

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Proportion of Net Income

LifeLine Asia Net Income Proportion =Net Income of LifeLine Asia/ All-World Life X 100 Net Income of InsureCo 2009 2008 2007 =22/1250*100 =1.76% =21/3000*100 =0.7% =20/2400*100 =0.833% All-World Life Insurance =10/1250*100 =0.8% =8/3000*100 =0.267 =5/2400*100 =0.208

Net Income from LifeLine Asia contributes 1.76% of total Net Income of InsureCos Net Income while All-World Life contributes 0.8% of Net Income of InsureCo.

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Net Income/Customer Analysis

Net Income/Customer($) 2009 2008 2007

ALL-World Life
Growth Rate LifeLine Asia Growth Rate

40
12.68% 20 -4.76%

35.5
42% 21 -5.49%

25
22.22

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.
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Region Based Analysis

Revenue North America Europe Asia Revenue
5% 15% North America Europe 80% Asia

Net Income 70% 20% 10% Net Income

10% North America

Customers 60% 30% 10% Customers

10%

80% 15% 5%

North America 80% 70%

Europe 15% 20% 60% Asia 5% 10%

20%
70%

Europe Asia

30%

Inference Net 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 InsureCos Net Income and Asia accounts for just 10% of Net Income of InsureCo

Net Profit Margin of InsureCo(Life Ins.)

2009 North America Asia =437.5/10000*100 =4.375%1 =62.5/625*100 =10%

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 comparing companies in the same industry.

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Expenditure per Revenue Analysis

North America Revenue(MM$) Expenditure(MM$) Expenditure/Revenue*100 10000* 9562.5 95.63% Europe 1875 1750 93.33% Asia 625 562.5 90.03

North America
4%
Expenditure Net Income

10%

Asia
Expenditure Net Income

96%

90%

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%}
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Qualitative Description
Life Insurance Operations of InsureCo in Asian region accounts for 10% of Net Income of InsureCo. Net Income from LifeLine Asia contributes 1.76% of InsureCos Net Income. Role of LifeLine Asia in the Asian Region is significantly important. Consequentially. Proportion of Net Income realized from North American 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 also important on reciprocal basis. While Net Profit Margin from Asian 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 American Operations of InsureCo
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CONCLUSION

Profile : A U.S. based life insurance business , with $100M in annual revenues
Growth Pattern : From 2007 to 2008 revenue increased at 6% , net income at 30% , customer base at 13% ,whereas from 2008 to 2009 revenue decreased at a rate of 5% , net income at 25% and customer base at 11% respectively

Asia
10%
Expenditure Net Income

90%
Net income/customer 1.94 1.67 1.11

Current year analysis : Net income percentage highest in Asia at 23% Region Based Analysis : Asian net income at 10%
North America

Europe

Asia

with 10% customer base

Net Income
10% North America Europe 70% Asia 20%

Customer based analysis : The net income per consumer is $1.94 in case of America and $1.67 in case of Asia , which is roughly on the same lines

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OTHER KEY FACTORS

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Economic Outlook
USA ECONOMIC GROWTH (GDP per Capita) Slow growing economy(2% in 2011-10) making it difficult to attract new customers and retain existing one Looming Regulatory changes pose challenges to Life Insurers ASIA Emerging market , greater growth opportunity (7%)

REGULATION/LEGAL COMPLIANCE

Improved Regulatory Systems. Regulations and Legal Compliance still at premature level as compared to USA High Growth Rate. High Potential for Insurers Improved product innovation and distribution system

AGEING POPULATION (25-55 years) PRODUCT INNOVATION

Very Low Growth Rate. Limited Opportunity Limited product innovation and distribution system

Insurance Outlook
NORTH AMERICA SUPERIOR UNDERWRITING OF INSURANCE POLICIES Austerity Measures limit scope of writing new insurance policies in coming years ASIA There will undoubtedly be a dash by insurers to position themselves to achieve maximum penetration of the growth in the Asian insurance markets Insurance Premium grew 16.98% in 2010 as economic rebound in emerging markets helped increase Premium.

TOTAL INSURANCE PREMIUM

Growth of Insurance Premiums was mere 2.32% from 2009

EARNING CAPACITY

Persistent low interest rates , Limited capital pressure increased capital pressure

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Demographics
NORTH AMERICA GDP RATE POPULATION GROWTH RATE POPULATION(MM) 2% 0.96% 310 ASIA 7% 1.8% - 2.2% 3002

INSURANCE PREMIUM 2% GROWTH RATE

LIFE INSURANCE PREMIUM($MM) AGE (25-55) for Year 2010-15 506228 0.15

16%
761970 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
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Insurance Penetration

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

There is a positive correlation between a countrys 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,

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

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

This huge difference in densities gives some idea of the potential which different markets have for growth. Asias 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
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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 and annuity insurers. By 2015, approximately 39% of the world's economy is predicted to be in AsiaPacific
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Implication of the Comparison

The above comparison between Asias insurance industry and American Insurance Industry has illustrated the following three points

I. The relative position of Asias insurance industry in the world market has ascended to 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 Asias economy. In sum, we can conclude that the current Asias insurance industry is at a stage where it can be described as fast growing, low level, large potential. Demographic changes 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 broad regulatory and economic uncertainty in the coming year and beyond.
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CONSIDERATION FOR OPERATIONAL SEPARATION PLAN

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4Cs 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 InsureCo

IV. Company

Taxation Matters Create a Divestiture Team Proper utilization of resources retained and generated funds
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4Cs Analysis of InsureCo

I. Community

Protect Investors 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.
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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 its strength by formulating policies based on demographic pattern of individual Asian economies.
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Comprehensive Considerations

The transaction team is charged with meeting the expectations of all constituents--employees, customers, stockholders, regulators, vendors and the media--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 weighing the 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 defines clear roles and responsibilities--is in place. The plan should be reviewed throughout the transaction to measure progress against defined goals.

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CORE GENERAL INSURANCE BUSINESS

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Quantitative factors
Industry Segment Overview
3-yr Projected Growth (CAGR)

Insurance Co Segment

2009
Life Property and casualty Long-term disability

2009
Life Property and casualty Long-term disability

15%

-3%

50% 10% 40%

70%
15%

6%
2%

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 and reduce 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.

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APPENDIX
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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/2010GlobalInsuranceIndustryFactsheetfinal.pdf http://www.imf.org/external/pubs/ft/weo/2009/update/01 http://www.irdaindia.org/annual_handbook/Table%2026.%20Insurance%20Penetration%20a nd%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_insuranceproducts-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/DcomUnitedStates/Local%20Assets/Documents/us_consulting_breakingupwithoutbreakingdown_0 82610.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)] X 100 Derivation of $10000MM =>25000(InsureCo Revenue $MM) X 50%(Life Ins. Segment) X 80%(North America) =10000
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Growth of Insurance Premium

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

Population Growth Rate- Age Group(25-55)

United Nations Population :World Population Prospects

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References
1. Dr. Krishna Sachdev , Professor Department Of Commerce , Hans Raj College II. Rajesh Kumar Gupta, FCA Partner, RAA & Co.

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Approach Adopted
CASE STUDY GUIDELINE UNDERSTANDING

DATA ANALYSIS (QUANTITATIVE ANALYSIS)

EXPERTS , REFERENCES , INTERNET , RESEARCH PAPERS IDENTIFICATION OF POSSIBLE AVENUES

QUALITATIVE ANALYSIS + OTHER CONSIDERATIONS

INFERENCE BASED SOLUTION

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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.
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THANK YOU
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