Transaction Structures and Insurance, Part 3: Mergers, Rollups, and Carve-Outs

The underlying structure of a middle-market private equity or growth equity transaction has specific implications on the correct method of implementing and managing the risk management and insurance profile. In Part 3 of this three-part series, we review Mergers, Carve-Outs, and Rollup transaction structures.

Middle-market private equity or growth equity transactions have specific implications on risk management and insurance programs pre-close, at close, and post-close. Person typing on laptop keyboard with data trends overlay In Part 1 of our three-part series focused on transaction structures and insurance implications, we discussed the most basic question of whether or not the deal is an asset or stock transaction. Then in Part 2, we explored the implications of a majority-control or minority-control investment. Finally, we conclude our series in Part 3 where we review mergers, rollups, and carve-out transaction structures.


A new Property, Casualty, Management Liability, and Employee Benefits program should be implemented at close (or post-close for Benefits) in a merger transaction. Technically speaking and depending on the structure of the transaction, separate programs can remain in place. For example, if a holding company is established and two separate entities are purchased by the holding company and the operations, P&Ls, and everything is to remain separate, it may make sense to have separate programs in place. And, if the operations of one entity are so different from the other, it may make sense to keep them separate versus trying to combine them. For most mergers, however, where two or more entities are being combined into a single go-forward organization (or combined for all intents and purposes under a holding company), it will always make sense to implement a new program at close. One argument against implementing a new program at close is typically, "We have so much going on right now, can't we just add the smaller entity's policies and exposures to the larger entity's program?" We see this as a mistake and always recommend a new program. Here's why:

  • Operational differences and insurer appetite. When the underlying Property, Casualty, and/or Management Liability program was underwritten for each separate entity, the insurer obviously did not know a merger would occur and did not underwrite the exposures of the other entity. The second entity may be involved in operations the insurer does not want to pick up under their policy.
  • Scalability of programs. Most small Property and Casualty programs are not equipped to scale at the rate that mergers are seeking to grow.
  • Economies of scale and cost efficiencies. From a cost perspective, as exposures increase, rates should decrease (all else being equal). By combining all exposures into one comprehensive program, economies of scale should be achievable from a cost perspective. For example, if the two separate entities each have revenues of $50 million, the insurance program for one comprehensive company with $100 million revenue should be more cost efficient than two separate programs at $50 million.
  • Future add-on acquisitions: Implementing a consolidated, comprehensive platform of insurance at the outset sets up easy integration and implementation of future add-on acquisitions.

Corporate Roll-Ups

Private equity investors have long been drawn to the buy-and-build strategy to build long-term value. Many industries, especially the Healthcare, Technology, and Insurance sectors, are rife with opportunities for consolidation. For example, over the past several years in the healthcare sector, we have seen rampant consolidation in all forms of senior care, dental practices, ophthalmology, physical therapy, gastrointestinal, and dermatology, to name a handful. The investment strategy is well-known: Acquire a platform business and make additional add-on acquisitions to add to the initial platform. This consolidates resources, improves operational efficiency, expands geographical reach, reduces expenses, and increases revenues. At exit, the goal is to have a much larger organization that is worth more as a whole unit than separate, individual, smaller entities. There are two viable avenues to approach roll-ups from an insurance perspective:

  1. Leave the existing insurance programs in place for add-ons and allow each entity to handle its own insurance policies.
  2. Create a comprehensive, consolidated platform of insurance onto which all entities are combined for purposes of insurance.
Separate Programs   Consolidated Program  
Pros Cons Pros Cons
  • Each entity has a separate policy and limit available to that specific entity
  • Each manager of the individual entity being acquired retains responsibility of the program
  • No economies of scale for cost
  • Coverage redundancies
  • Unable to scale quickly with growth
  • Separate effective dates for all entities' and potentially all policies
  • Differing insurance strategies lead to different program structures across the entire entity
  • Each entity still needs to purchase run-off and implement new policies at close (claims-made)
  • Administration of different policies, different insurers, etc.
  • All coverages aligned on a single date
  • Ease of policy administration – one set of unified policies with one set of insurers
  • Economies of scale for cost
  • Strategic alignment across the entire organization
  • Scalability
  • Uniform limits can apply to each location
  • Upfront work in establishing the program
  • Potential for issues with aggregated limits
  • Retentions may be higher
  • Existing policies will need to have run-off put into place

Key Considerations for Insurance in a Roll-Up

Implement a Consolidated Platform

The cleanest, most efficient, and most cost-effective manner of approaching a roll-up transaction from an insurance perspective is to implement a consolidated, comprehensive platform of insurance at close of the initial platform investment, onto which future add-ons can be seamlessly added. It is easier to implement a consolidated platform initially versus later in the game. If implemented properly for the initial platform transaction, adding additional entities onto the platform should be streamlined and efficient. The due diligence for the add-on acquisition also should be standardized and efficient. If the programs are kept separate and the consolidated program is implemented post-close or after several add-ons have already been completed, the process becomes more cumbersome and the full benefits may not be realized immediately. We have found that maintaining separate programs at any meaningful level of scale quickly becomes untenable and inevitably leads to coverage gaps, redundancies, and critical items being missed and claims handling in any cohesive, consistent approach is impossible.

Change in Control Provisions and Run-Off

If the add-on has any policies that are claims made versus occurrence (such as Professional Liability, Management Liability, Cyber Liability, or Medical Malpractice), the Change in Control Provision will be triggered and the policy will be automatically placed into run-off at close. We recommend the seller purchase a six-year run-off policy to continue to protect the pre-close entity for incidents that arise as claims post-close. If a platform of insurance has been implemented, the new add-on acquisition's exposures can be added to the platform's insurance program and policies at close. If not, the individual entity must purchase new coverage for those claims-made policies at close for the go-forward exposures. The intent of purchasing run-off is to delineate which entity, Buyer or Seller, is responsible for what and when. By placing run-off, there is a clear intention that Seller is responsible for pre-close incidents, while Buyer is responsible for any go-forward incidents.

Policy Integration

If a consolidated platform has been implemented, due diligence for the add-on becomes a matter of policy integration versus due diligence of what is in place pre-close. The reason for this is the pre-close policies either enter run-off, are cancelled at close, or allowed to run to their natural expiration date. Any policy that is not claims-made can be rolled into the master program immediately at close or run to its expiration date and then be rolled into the master. As a result, during due diligence, the buyer does not and should not need to care about the pre-close program because it will simply go away.

Divestitures / Carve-Outs

A new Property, Casualty, Management Liability, and Employee Benefits program needs to be implemented at close (or post-close for Benefits) in a divestiture or carve-out transaction. Unlike a merger where a Buyer could try and simply push two separate and distinct programs together (which we do not recommend as noted above), a new program must be implemented in a carve-out because no existing coverage exists for the new entity that will exist post-close. During the transaction, there is little to no diligence to be completed and most if not all effort should be spent obtaining information on the go-forward entity and obtaining options for the go-forward program. For example, performing due diligence on the insurance program for a parent company with a $3 billion market cap will not help the Buyer understand the risks and exposures that the $200 million unit being divested will have post-close. Underwriters will view these as two separate types of risks to underwrite. And, the Seller will typically not allow any information to be shared about the larger organization unless it is pertinent to the divestiture. For a carve-out, the Buyer will rely on the insurance advisor to:

  • Provide go-forward cost projections and analysis
  • Benchmark coverage details and limits
  • Broadly solicit options for all coverages
  • Present formal quotes from insurers for the go-forward program
  • Arrange draft certificates for buyer and lenders participating in the transaction
  • Formally bind the go-forward program at close
  • Issue all official certificates, auto ID cards, and so on the same day as closing to satisfy lender requirements
  • Work with management post-close to implement any necessary risk control mechanisms to improve the general structure and total cost of risk of the newly implemented program

On the Employee Benefits and 401(k) / Retirement side of the equation, a Transition Services Agreement is typically included as part of the deal. This will allow the newly divested company to continue to use the old parent company's Benefits and 401(k) program for a certain period of time, usually 60 to 90 days post-close. The broker works with management during that window to obtain options for a new program for "NewCo." This is highly beneficial for all parties because it typically takes 60 to 90 days to approach the market for options, hold open Enrollment meetings with employees, and implement the new program. A new Property, Casualty, Management Liability, and Employee Benefits program should be implemented at close (or post-close for benefits) in a merger transaction. In a roll-up, there are two options, one of which is leaving the existing insurance programs in place for add-ons and allowing each entity to handle its own insurance policies. The other is creating a comprehensive, consolidated platform of insurance onto which all entities are combined for purposes of insurance. This is the cleanest, most efficient, and most cost-effective approach. For carve-outs, a new Property, Casualty, Management Liability, and Employee Benefits program needs to be implemented at close (or post-close for Benefits). In all cases, an insurance broker or advisor who is not accustomed to working on transactions may encounter issues along the way, which could ultimately lead to timing problems and/or mistakes within the new or existing insurance program. As we conclude our three-part series on Transaction Structures and Insurance, it's important to remember every middle-market transaction, no matter how large or small, will have specific implications for insurance depending on the structure of the transaction. The due diligence process, pre-close work, and post-close implementation and brokerage of the Property, Casualty, Management Liability, and Employee Benefits program is directly impacted by the structure of the transaction.

Transaction Type Property and Casualty Management Liability Employee Benefits Effect on Total Cost
Minority Control, Stock No Depends No Depends
Majority Control, Stock No Yes No Increase
Majority Control, Asset Yes Yes No Increase
Merger Yes Yes Yes Decrease / Neutral
Carve-Out / Divestiture Yes Yes Yes Depends
Woodruff Sawyer has been working in the middle-market private equity space for 25+ years. Our expert transaction advisors have worked on thousands of transactions across the industry and size spectrum. Understanding the various transaction structures and the required expertise in each circumstance is embedded in our DNA as a firm. After 25+ years, we've seen it all and bring this expertise to each and every transaction on which we are engaged.

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