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Case Studies

Garanti Bank in Turkey sells insurance products through two of its subsidiaries: general insurance products (such as motor and household insurance) through Garanti Sigorta and life insurance and pensions through Garanti Emeklilik.

Garanti Bank decided to sell a significant stake in its general insurance subsidiary and a smaller stake in its life and pensions business to a major multinational insurer. The sale aimed to include a long term distribution agreement between Garanti Bank and the acquirer.

Watson Wyatt was appointed as the sole financial advisor to Garanti Bank for the process. This meant acting as actuarial advisor as well as carrying out many of the functions normally performed by an investment bank. This enabled us to call on our actuarial expertise, as well as our detailed knowledge of and relationships with the likely acquirers. We were also able to share our experience of working on insurance merger and acquisition projects in Turkey and elsewhere in the world, particularly in other developing markets.

Process

A three stage auction process was then carried out:

Stage 1: The information memorandum and actuarial appraisal were provided to potential bidders, and bidders' questions answered. Bidders were then invited to submit non-binding bids. It was important to maintain close contact with bidders to ensure as many credible bids as possible were received. The bids were then reviewed, and we assisted Garanti Bank to draw up a short list to take to the next stage.

Stage 2: The bidders still in the process were granted access to a data room where they could access all relevant information about the companies. We were able to assist in managing each party's access to the data room and ensuring that all of the bidder's questions were answered, as well as arranging more detailed management and actuarial meetings. The bidders were then invited to submit a binding bid. We were able to use our relationships with each bidder to manage this process and to help Garanti Bank to review the bids and select preferred partners.

Stage 3: By this stage only a small number of bidders were left in the process. We concentrated on managing the final negotiations of price and contract terms between the bidders and Garanti Bank, which led to the final selection of a partner.

Outcome

The successful bidder was the Dutch insurer Eureko who acquired 80% of the general insurance business, as well as a 15% stake in the life and pensions business. The total amount payable for the transaction was €465 million. This reflected both the potential that lies within the dynamic and fast-developing Turkish market, and the quality of Garanti Bank as a business partner.

We received very good feedback from Garanti Bank and Eureko as well as from the unsuccessful bidders about our role in the process. This also lead to further opportunities in the future to provide strategic and actuarial advice to the new partner to maximise the business potential of the deal.

Standard Life Demutualisation: Life Project

Based in Edinburgh, Standard Life is one of the largest life assurance and pension providers in the United Kingdom and the fourth largest in Canada. It also operates in Germany, Austria, Ireland, India and China. Prior to its demutualisation, Standard Life was the largest mutual company in Europe.

In 2004, Standard Life initiated a strategic review of its business. Watson Wyatt, already the principal actuarial adviser to Standard Life, was one of the professional advisors appointed to provide advice and support to the senior executives leading the review.

The review concluded that working toward demutualisation and flotation (initial public offering) would be in the best interests of Standard Life’s members and policyholders. The company’s Board then confirmed Watson Wyatt as actuarial advisors to support the company in preparing for demutualisation.

For the two-year duration of the demutualization project, Watson Wyatt associates worked within multidisciplinary teams, along with Standard Life and its other professional advisors. Watson Wyatt’s specific role was two-fold:

• To advise on the design of a post-demutualisation corporate and fund structure that would meet the future needs of the business as a shareholder-owned entity, while maintaining the benefit expectations and security of policyholders.
• To produce a comprehensive report on the European Embedded Value (a measure of the value of a life assurance business to its shareholders) for inclusion in the prospectus for the flotation.

Watson Wyatt associates were also heavily involved in many other aspects of the demutualization and flotation. Over the course of the demutualisation project, approximately 60 Watson Wyatt associates were involved in the firm’s work for Standard Life. A number of associates had the opportunity to build a strong rapport with the members of the Standard Life teams.

The culmination of this team work was the company’s successful flotation on the London Stock Exchange in July 2006. Standard Life is now a publicly listed company with a market capitalisation of approximately £5 billion. 

 Winterthur/XL Arbitration – Non-Life Project

Watson Wyatt was appointed as the independent arbitrator in the dispute between Winterthur and XL Insurance.The dispute itself arose from the sale of an insurance business by Winterthur to a Bermudan insurance company, XL Insurance (Bermuda) Ltd, in June 2001. The sale and purchase agreement provided that three years after the sale, the adequacy of the reserves of the insurance business, as valued at the time of sale, would be reviewed. To the extent that the reserves appeared to be inadequate after the three year period, a balancing payment was to be made from Winterthur to XL. There was no doubt that such a balancing payment was due, not least because the business had faced large claims arising from the World Trade Centre collapse and large scale US pharmaceutical claims. There was a significant dispute, however, as to the correct amount of the payment. The sale and purchase agreement provided that ultimately this dispute was to be resolved according to a baseball arbitration procedure.

Baseball arbitration is an unusual method of resolving disputes, originally used in the negotiation of baseball players' salaries. It involves each party to the dispute putting forward an initial 'bid' indicating what it believes the correct figure for the amount in dispute should be. An independent expert is then appointed to make its own determination of the figure. Crucially, whichever of the parties' bids is closest to the figure determined by the independent expert 'wins' the baseball arbitration and is deemed to be the correct figure. In the current case involving Winterthur, there was some US$900 million between the two bids put forward by the parties.

Our role included the following:

• Estimating the amount of reserves that XL should hold to cover future payments for the business that had been transferred
• Estimating the premium that had been paid to XL for the business that had been transferred in the three year period

The final result was that we estimated the future payments to be closer to the estimate that Winterthur had submitted, which resulted in Winterthur winning the arbitration and XL losing the arbitration.