The private health insurance space remains competitive and dynamic – with many insurers revisiting their long-term strategies.
Earlier this year, the Australian Prudential Regulation Authority (APRA) signalled a tough road ahead for private health insurers (PHIs), noting rising healthcare costs, shifting demographics, and evolving consumer expectations.
On top of this, the regulatory landscape for PHIs is increasingly complex. APRA continues to bolster prudential standards, public companies face new reporting requirements, and in March this year, the Financial Accountability Regime (FAR) was extended to insurers, placing additional obligations on directors and senior executives. Mutuals in particular will be affected by many of these changes, including potentially by the suite of governance-related changes proposed by APRA (discussed by KWM, here).
With the aim of minimising entity failure risk, under CPS 190 (Recovery and Exit Planning) APRA requires PHIs to have an exit plan that sets out how the insurer would respond to stress that threatens its viability. In many instances, the exit plan may contemplate a merger, consolidation or restructure. APRA is also requiring regulated entities to undertake resolution planning under CPS 900. While it is a matter for APRA to determine the resolution option for each entity to evaluate, it is likely that M&A solutions will form part of the resolution plan for PHIs.
In other instances, PHIs may determine that a merger or acquisition is not required for recovery or resolution, but desirable for scale and growth.
In each situation, there are a range of factors to be considered which will impact the timing and execution of a deal.
M&A considerations in the PHI space
Transactions in the private health insurance sector can be facilitated in a number of ways including under the Private Health Insurance (Prudential Supervision) Act 2015 (Cth) (PHIPS Act), which enables the transfer of insurance policies by causing the policies that are referable to a transferor’s health benefits fund to become referable to a transferee’s health benefits fund.
Notably, mergers in the PHI space have a number of distinct features, which distinguish them from transactions in relation to life and general insurers. While the PHIPS Act is a useful mechanism for transfers of private health insurance policies, it does not contain the same far-reaching mechanisms as the Financial Sector (Transfer and Restructure) Act 1999 (Cth) – which governs the transfer and restructuring of authorised deposit taking institutions (ADIs), general insurers and life insurers, and can facilitate the total transfer of assets and liabilities from one regulated body to another.
Accordingly, for mergers in the PHI space, parties may need to implement a bifurcated inter-conditional transaction structure where the policies referable to the transferor’s health benefits fund are transferred under the PHIPS Act and the balance of the non-policy assets and liabilities (key contracts, technology, intellectual property, employees, etc) are transferred under general law (ie under a more conventional corporate or asset sale). The proposed merger between Queensland Teachers’ Union Health Fund and Teachers Federation Health Limited, via the PHIPS Act and a scheme of arrangement under the Corporations Act 2001 (Cth) (Corporations Act) is a recent example.
Determining the right transaction structure requires consideration of a range of factors:
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Company type and capital structure
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APRA and the ACCC
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Due diligence and business structure
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Employee considerations
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In considering the above and a range of other relevant factors, the parties can determine whether a PHIPS Act transfer is sufficient/feasible, whether some ancillary asset and liability transfers are needed, or whether a more complex dual structure is appropriate.
KWM has experience acting for a range of APRA regulated entities such as private health insurers (including those in the not-for-profit space).
