An acquisition occurs when a company, an individual, a group of individuals, or some other group buys a controlling interest in a company. Mutual insurers can acquire but cannot be acquired since there is no stock to be purchased. Stock insurers can both acquire and be acquired. The new controlling stockholder(s) may either retain the existing or install new management.

The acquisition of a life insurer may be friendly or hostile. In a friendly takeover, the acquiring company offers to purchase a company. The company to be purchased agrees to the acquisition and the price for the stock. The board of directors of the acquiree approves the offer and publicly recommends to its stockholders that the offer be accepted. Effectuation of the acquisition requires the approval of both the stockholders and the insurance commissioner(s) of the state(s) in which any involved insurer(s) is domiciled. In addition, the SEC and/or the antitrust authorities may also be involved.

A hostile takeover occurs when the acquirer proceeds with a takeover even though the board of directors of the company to be acquired (the target company) refuses the acquisition offer. To obtain a controlling interest, the acquiring company makes a tender offer directly to the stockholders of the target company thereby circumventing the board of directors of the target. The acquirer announces publicly the offer to purchase the stock of the target at a specified price, usually significantly in excess of the market value of the stock. Not uncommonly, the purchase is conditioned on the acquirer being able to obtain a certain percentage of the target company’s shares within a specified period of time (so as to assure the acquirer of at least practical controlling interest if and when the tender offer is successful). If the takeover succeeds, the acquiring company obtains control, can elect a new board of directors and decide on management policy.

Hostile takeovers often engender long and expensive legal and financial battles. The target company may make a counteroffer so as to buy enough of the stock to prevent the acquirer from obtaining controlling interest. Or the board of the target may attempt to convince its stockholders that the takeover would not benefit the long-term value of their stock. If the target believes that it cannot prevent a hostile takeover, it may seek a takeover by a purchaser more to its liking, called a white knight.

In the 1980s, the technique of leveraged buyout (LBO) came into vogue as a means of acquiring a company. In an LBO, the acquiring company finances the acquisition primarily through borrowing. After a successful takeover, the acquirer repays the debt from money generated by the operations of the acquired company or through the sale of the acquired company’s assets.

A merger occurs when two or more companies are legally joined together to become one. One company may be absorbed by another with the latter being the surviving company. Or two or more existing companies may be merged into an entirely new company.

Depending upon the circumstances of each individual situation, the advantages of mergers might include the following. An insurer in weakened financial condition may seek a financially stronger partner to aid in overcoming its financial difficulties and/or to gain access to additional surplus to fund expansion and growth. An insurer may decide to offer new products and/or services and conclude that it would be more feasible to do so through a merger with an existing company already providing such products and/or services rather than expending the time and money to develop them from ground zero. Or an insurer desiring to expand into new geographical areas may find that joining an insurer already licensed and possessing a marketing force in such areas constitutes a more rapid and economical mode of expansion. Companies also seek to achieve economies of scale, that is, decreased unit costs as the size of operations increases, to reduce the price of their products and/or achieve greater profits. Also, larger and growing companies may be more attractive to customers seeking security and to potential good management and other personnel.

On the other hand, mergers can give rise to significant problems. The effectuation of a merger often incurs enormous legal and accounting costs and may give rise to tax problems. Depending on the specific merger, certificates of authority to do business might have to be modified, renewed or newly obtained in each of the various states in which the surviving insurer contemplates continuing to do business. Various state filings may have to be made and such matters as agent appointments need to be either confirmed or renewed.

Mergers can engender substantial anxiety among managements and employees resulting in either loss of key people or substantial time and money to retain them. When merging companies are situated in different locations, if the personnel of one or more of the former companies must move, there are substantial costs in effectuating their move as well as the costs of inevitable turnover. Political obstacles can arise, especially when the merging parties are domiciled in different states, resulting in one state regulator relinquishing domiciliary regulation of what might be a substantial company. There also may be a loss of tax revenue and jobs in the state of the nonsurviving company. Issues of redomestication can arise. Numerous business relationships, for example, contracts with agents, will need to be reviewed and perhaps redone. Difficulties will inevitably emerge from efforts to blend managements, corporate philosophies and systems of different companies as well as from unexpected legal difficulties. Finally, there is the danger that the perceived benefits of the merger may not be realized, at least to the extent contemplated, and that undreamed-of difficulties will emerge.

When a company acquires one or more companies, that is, purchases a sufficient amount of their stock to possess controlling interest, the acquired companies become subsidiaries of the acquirer which, in turn, becomes their parent. Such a group of companies constitutes a holding company system with the parent being the holding company.

Traditionally and commonly insurers operated as independent free standing entities or as a part of insurance company groups. Originally, the holding company concept was utilized to acquire a group of insurance companies in related lines. By the late 1960s, however, the nature of the insurance environment changed as a result of two trends.

First, in efforts to improve earnings and long-term growth, many insurers sought to diversify by venturing into new lines of insurance (for example, a life company acquiring a property and liability insurer) and/or into noninsurance enterprises. The latter commonly involved venturing into the financial services area such as acquiring securities broker-dealer organizations, mutual fund management companies, consumer finance companies and other related institutions. Several life insurers found that forming a holding company system afforded them greater ability to diversify their services and products, fewer restrictions on investments, and enhanced flexibility in raising capital.

Second, several life insurers were taken over either by other insurers or by noninsurance company acquirers thereby becoming a part of a conglomerate (a conglomerate being a group of unrelated businesses under the common control of a holding company). Sometimes being part of a conglomerate contributes to the strength of an insurer. On occasion, however, an acquirer is less interested in the well-being of the insurer and more interested in gaining access to the insurer’s accumulation of liquid assets and substantial cash flow.

A holding company may be an insurer or a general business corporation. A mutual insurer, by its very nature, is not subject to being acquired by another company purchasing shares of stock in the insurer since there are no such shares. However, a mutual insurer (or a stock insurer if it so chooses) can become involved in a "downstream" holding company system by creating or acquiring subsidiaries perhaps including a "downstream" holding company which, in turn, can acquire other enterprises as subsidiaries. The mutual insurer sits atop the holding company structure. A downstream holding company presents fewer insurance regulatory concerns since the parent insurer, which continues to control its own destiny as well as the destiny of any subsidiaries acquired downstream, remains directly subject to insurance regulatory control.

In contrast, there are "upstream" holding companies where the holding company acquires the stock of the insurer. Stock insurers tend to become involved in holding company systems in one of two ways. First, a stock insurer can organize an "upstream" noninsurance company holding which sits atop the intercorporate structure. The insurer’s board of directors and management, or appropriate portion thereof, become the board and management of the holding company. The insurer becomes its subsidiary. As a noninsurance company, generally speaking, the new parent is outside the scope of insurance regulation. It can engage in a host of activities through different subsidiaries including insurance, other financially related businesses and/or totally different enterprises. Second, a stock insurer can become involved, either voluntarily or involuntarily, in a holding company system by being acquired by an outside company which becomes the insurer’s upstream holding company.

Although acquisitions, mergers and holding companies involving insurers have become commonplace, some insurers have resorted to less drastic structural changes to accomplish some of the same objectives. A strategic alliance can be defined as an ongoing relationship involving risk and reward sharing by two or more independent organizations. Through such alliance, a life insurer gains access to the resources of other firms yet still retains its own independence. Insurers possess a long tradition of entering into some form of strategic alliances with outside business firms such as, for example, foreign and domestic United States insurers, securities firms, third-party administrators and commercial banks. By cooperating with other firms, an insurer can enhance its ability to respond to today’s rapidly changing environment of increased competition from traditional competitors, the integration of financial services, and the globalization of the financial service marketplace.