As group insurance advisors, we often guide clients through business merger or acquisition transactions. Group insurance is an underestimated element in the business acquisition process, but it deserves consideration both before and after the purchase.
The objective of due diligence is to assess the financial results and their contributing factors in order to determine the fairness of the acquisition price. You will find below the key aspects of group insurance that must be considered as part of due diligence and in view of preparing for the post-acquisition period.
Group insurance costs can vary widely from one year to the next and have a major impact on the company’s future profitability. Did the company issue a call for tenders for group insurance less than 12 months ago and obtained a 25% cost reduction? In this case, chances are premiums could rise significantly at the time of the next renewal. A 20% increase is not that uncommon when it comes to group insurance, especially after a guaranteed rate has been granted. This is why it is important to call on an expert for a review of the existing plan.
A group insurance plan costs $1,000,000 per year, of which 50% is paid by the employer. Should costs rise by 20% upon the next renewal, this would represent an additional expense of $100,000 for the employer. If you correctly evaluate this future increase, you can lower the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by $100,000 and thus save $600,000 on the purchase of the company (assuming an acquisition price of 6 times the EBITDA).
Costs may indeed rise, but they can also be reduced. If the group insurance plan has been insured with the same carrier for the past 7 years and no call for tenders has been issued, there is a strong chance that savings could be achieved in the short term. Understanding the plan history can help better anticipate surprises, both good and bad.
An analysis of the latest group insurance renewal reports can also reveal a lot about the business acquisition you are interested in. Does the company have a serious problem with a 30% disability incidence rate? This is probably indicative of human resource management issues. Is there a high rate of antidepressant use? Have claims for paramedical practitioners (psychologists, massage therapists, etc.) gone through the roof? These are undoubtedly signs of a deeper problem.
It is also advisable to look at the list of prescription drugs used and detect the presence of high claimants. These days, it is not rare to see recurring claims exceeding $50,000 a year for a single insured member. Although pooling mechanisms exist, the impact on a group is material and must be factored in.
Is the group insurance offered by the company you want to buy underwritten on a retention basis and does the plan have a large deficit to be covered? Beware! This debt must be included in your assessment. Conversely, the company may have a surplus in its self-insured or retention-basis plan, which can be used to reduce future plan costs.
Another aspect of employee benefits that must not be overlooked is whether some employees were granted post-employment entitlements. For example, the company may have agreed to maintain group insurance coverage for a relatively long period further to the involuntary termination of a manager. In such cases, it is important to assess the value of these commitments, especially if you expect to restructure some positions.
Although this is becoming increasingly rare, some businesses still offer post-retirement plans to their employees. Often, employers have their hands tied and cannot withdraw from these obligations. It is therefore advisable to ask for an independent assessment of the value of these commitments.
In a unionized company, the collective agreement may include provisions pertaining to group insurance. In the perspective of benefits alignment or coverage reduction, the collective agreement may significantly limit the employer’s power to make changes.
Are the benefits too generous? Does the plan meet the employer’s objectives and employee needs? Is the employer/employee premium sharing ratio too generous and could it be adjusted? Are administration and pooling fees competitive? Have best cost management practices been implemented? In short, with a simple analysis from your broker, it is possible to find out whether recurring savings could be achieved once the deal has been closed.
Aligning Benefits Following a Business Acquisition
Further to a merger or acquisition, you could end up with several divisions that come with completely different employee benefits. Typically, one division will have very generous benefits entirely covered by the employer, while another division has a conservative plan where the employer only pays 50% of the costs. Is it normal for employees now working under the same roof not to have the same benefits? More often than not, the answer is in the question.
But, how can benefits be aligned without upsetting the employees with the more generous plan and without busting the employer’s budget? This is indeed quite a challenge, but the task is not insurmountable. Again, you will need an in-depth diagnosis of the two plans, employer expectations and employee needs. Each situation is unique, and it will be important to deploy an effective communication campaign, and make the changes fairly quickly.
Cost Reduction: An Easy Proposition?
Further to a merger or acquisition transaction, the first objective is generally to achieve profitability. A simple way to do so is to reduce group insurance costs. But beware! You must act carefully, so as to keep employees motivated and ensure their perception of the new owner remains a positive one.
There are several ways to reduce the cost of group insurance, such as amending the coverage, changing the employer/employee premium sharing ratio, changing insurers, implementing best cost management practices, etc. The first step consists in performing a comprehensive diagnosis and devising a sound game plan.
Group Insurance: Much More Than a Detail
Seeking advice from an AGA Benefit Solutions expert will help you get a better perspective! We will perform a due diligence review of the group insurance aspects and provide you with an informed opinion for your business acquisition process.
Group insurance costs can often reach thousands of dollars per employee. Thus, it is not something that should be ignored during a merger or business acquisition, if you want to avoid unpleasant surprises. Group insurance is a key component of total employee compensation, and it is important to be able to maintain this benefit in order to keep employees motivated.
Group Insurance and Group Annuity Plans Advisor | With a Bachelor in finance, Alexandre Timothy understands the challenges and realities of his clients, both from a financial point of view as well as a level of human resources and benefits. With his new outlook in a traditional industry, Alexandre offers innovative solutions to ensure the sustainability of social benefits while meeting the needs of participants and employers. During his six years of experience, Alexandre has stood out for his creativity and integrity, becoming a highly valued adviser by many of his customers.
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