Provident Life & Accident Insurance: The Acquisition of Paul Revere
Posted: 27 May 2002
SUBJECT AREAS: insurance, mergers & acquisitions, valuation
CASE SETTING: April 1996, U.S. disability insurance
Provident Life & Accident Insurance Company has made an initial bid to acquire a primary competitor, Paul Revere, from conglomerate, Textron. The due diligence process uncovers a significant block of problematic disability insurance policies. Provident is forced to assess the negative impact of this discovery on its initial valuation and revise its bid. In the process, the divergent views of the evolution of these policies by the bidder and seller have to be translated through discounted cash flow analysis into appropriate bid prices. Finally, this DCF analysis, in combination with multiples analysis, is used in negotiations with Textron and public shareholders.
This case provides a platform for (a) introducing students to the insurance industry by examining how insurers pool risks, incorporate asymmetric information in pricing and designing their policies, manage these risks by investing assets over time, and how this industry reports their financial results to investors; (b) demonstrating discounted cash flow analysis and multiples analysis in the insurance industry; and (c) discussing negotiation dynamics in an M&A situation involving a large majority shareholder and a minority public float and divergent views of future expected cash flows.
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