MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY

ISSUE 4,547

FRIDAY 26 FEBRUARY 2016

In depth: Underwriting on the front line

p8 p2

p4-5

RSA shares surge 12% as

full-year profit soars 43%

Cooper Gay sells US wholesale business to BB&T for $500m

insurance industry. Visit www.insuranceday.com/mergers-and-acquisitions

The conflict in Yemen marks a fundamental paradigm shift in modern warfare and, as

an inevitable consequence, changes the nature of the exposures

faced by underwriters in the London market

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NEWS www.insuranceday.com | Friday 26 February 20162

Cooper Gay sells US wholesale business to BB&T for $500mDeal includes US specialty managing general agencies and US reinsurance brokerage business

Scott VincentEditor, news services

Cooper Gay Swett & Crawford (CGSC) has agreed the sale of its US wholesale broking oper-ations to BB&T Corporation for

$500m in cash.The deal for the Swett & Crawford

component of the business includes its US specialty managing general agencies (MGAs), including JH Blades & Co, and US reinsurance brokerage business.

The specialty MGA Creechurch Inter-national Underwriters, which operates in Canada, is not included in the sale.

US financial services giant BB&T said the transaction is expected to add more than $200m in annual revenue to its in-surance arm, BB&T Insurance.

CGSC announced in November it was looking to spin of its US business follow-ing a review of the business by former Willis executive Steve Hearn after he replaced Toby Esser as chief executive.

Hearn said the proceeds of the sale will “provide us with the resources to transform our business”.

The group has come under some pressure from rating agencies, which have expressed concerns about its ini-tiatives to improve revenue growth and profitability.

Standard & Poor’s (S&P) downgrad-ed the company to a B- from B in 2014. It has placed the company on Credit-Watch with developing implications since the plans to sell the US business were announced.

CGSC was created by the merger in July 2010 of Cooper Gay, headquar-tered in London, and US broker Swett & Crawford.

Rating agencies will now be examin-ing closely how the sale affects CGSC’s credit profile.

Hearn said: “The impact of [yester-day’s] announcement on the group will be profound and we can now begin the next phase of our company’s develop-ment. We have the tools at our disposal for growth and a strategy that will set us apart.”

BB&T is one of the largest finan-cial services groups in the US. It is the fifth-largest insurance broker in the US and the sixth largest internationally, with revenues of $1.7bn in 2014.

“Swett & Crawford nicely enhances our insurance business and increases and diversifies our overall fee income profile,” Kelly King, BB&T’s chairman and chief executive, said.

John Howard, chairman and chief executive of BB&T Insurance, added: “This represents a compelling oppor-tunity to further build BB&T Insurance with the addition of a world-class com-pany with a strong and talented team of industry specialists.”

At present, BB&T’s wholesale insur-ance operations include property and casualty broker and managing general agent CRC Insurance Services, Crump Life Insurance Services and managing general underwriter AmRisc.

The deal is subject to regulatory ap-provals and is expected to close in the first half of 2016.

Last month it emerged BB&T had withdrawn its proposal to acquire a stake in London-based wholesale bro-ker Miller.

BB&T said it was no longer pursuing the transaction because of “unanticipat-ed regulatory hurdles in the US related to the investment”.

“The impact of [yesterday’s] announcement on the group will be profound and we can now begin the next phase of our company’s development”Steve HearnCooper Gay Swett & Crawford

NEWSwww.insuranceday.com | Friday 26 February 2016 3

Haley already seeing synergies from Willis Towers Watson mergerJohn Haley serves as chief executive of combined firm

Scott VincentEditor, news serivces

Willis Tower Watson chief executive, John Haley, said he expects the

harmonisation of compensation benefits among legacy Willis and Towers Watson employees will be one of the major challenges as he leads the integration of the combined firm.

Haley, who led Towers Watson before the merger, said the over-lap between the two companies was less than in the case of the Towers Perrin and Watson Wyatt merger of 2010.

“In that merger, we had two groups that had been competing for the same clients,” he said.

In contrast, Haley believes a number of revenue synergies can be achieved through the Willis Towers Watson deal, particularly through the distribution oppor-tunities offered by Willis’ middle- market presence.

Speaking at the Economist In-

surance Summit in London yes-terday, Haley said the two firms’ strategies were already converg-ing in the run-up to the merger.

Towers Watson had been looking to extend its business to include more products and solu-tions while Willis was moving from a traditional broking oper-ation to become much more fo-cused on analytics, he said.

“One of the earliest synergies has been combined the analytics Towers Watson had with the con-sulting and broking capabilities Willis had,” he said.

Haley said Willis Towers Watson is unlikely to pursue any acquisi-tions in the next year or two as it continues the process of bringing the two companies together.

“We think there are big syner-gies. Towers Watson did not have a distribution network in the mid-dle market and the Willis merger provides this,” he said.

The deal to combine the two firms was one of a number an-nounced within the insurance and reinsurance sector within the past 18 months.

Research by Willis Towers Wat-son shows there were 230 deals

in the insurance industry in 2015, compared with 235 the previous year. But the value of those deals has tripled from €40bn ($44.1bn) in 2014 to €130bn in 2015.

“Our survey has shown 82% ex-pect to make an acquisition in the next three years. The single biggest reason is revenue growth. With or-ganic growth opportunities slower compared with before, this is seen as a path to growth,” he said.

One of the significant trends of recent M&A activity has been the emergence of major Asian buyers.

“Asia sees western European countries as a great acquisition as they have technology which can be imported back to their home markets,” he said.

“Asia saw a lot of deals in 2015. The number of deals with an Asian target were four times larg-er in 2015 compared with 2014, while deals with acquirers from Asia were five times as large.”

“When we did a survey of the insurance industry we found 92% of acquisitions people had done were in places where they already had operations. For more than 60%, they were already in the top 10 in that market,” Haley added.

Maloney takes helm of Cathedral following management restructureLancashire Group chief executive, Alex Maloney, is to replace Peter Scales as the head of the group’s Lloyd’s subsidiary Cathedral Capi-tal, with effect from April 1, writes Sophie Roberts.

Maloney will be supported by Richard Williams, a longstanding member of the Cathedral senior management team, who has been appointed active underwriter.

Subject to Lloyd’s and other ap-provals, Williams has also been appointed director of Cathedral Underwriting, the Lloyd’s manag-ing agency, and will assume that role from John Hamblin, who will leave Cathedral. 

Williams will also be appointed to Lancashire’s underwriting and underwriting risk committee.

The senior management shake-up follows the surprise departures of Peter Scales and John Lynch, respectively chief executive and chief financial officer of Cathe-dral, at the end of last year.

At the time, Lancashire said the departures of Scales and Lynch were in line with its continued in-tegration strategy.

However, sources close to the situation alluded to a “falling out” between Lynch and Lancashire group chief financial officer, Elaine Whelan.

Additional changes at Cathe-dral include the appointment of Simon Fraser, the senior indepen-dent director on the Lancashire board, to the board of Cathdral Underwriting, subject to Lloyd’s and other approvals.

Lancashire also announced Lawrence Holder will step down from the roles of managing direc-tor and director of Cathedral Un-derwriting next year.

Lancashire acquired Cathedral Capital in November 2013.

Maloney said he was excited at the prospect of working even more closely with his colleagues at Cathedral.

ARC aims to become donor-free within next decadeAfrican Risk Capacity (ARC) has set itself a target of becoming “donor-free” between 2020 and 2025 as it scales up its operations, writes Scott Vincent.

The multi-country catastro-phe facility, which established its insurance arm through donor funding from the UK Department for International Development (DIFD) and German development bank KFW, also has ambitious tar-gets to reach 150 million Africans with its products by 2020.

To date, DFID has committed £100m ($139.5m), with KFW com-mitting a further €50m ($55m).

Mohamed Beavogui, director- general of ARC, said the facility is looking to increase its capital base to between $1.5bn and $2bn derived from premiums written across 30 countries by the end of the decade.

As the facility scales up, Beav-ogui said ARC will be looking for member governments to match donor investment until eventual-ly the company will build enough capital for it no longer to need to rely on donor investments.

In a presentation at the Econ-omist Insurance Summit in Lon-don, Beavogui said ARC is also working on a model that will be triggered by frequency of disas-ters as part of a proposed extreme climate facility.

ARC was established for the 2014 policy year, with three coun-tries in the Sahel – Niger, Mauri-tania and Senegal – all receiving payouts during its first 12 months.

For the second policy year, which began on May 1, 2015, sev-en countries took out policies: Gambia, Kenya, Malawi, Mali, Mauritania, Niger and Senegal.

“One of the earliest synergies has been combined the analytics Towers Watson had with the consulting and broking capabilities Willis had”John Haley Willis Towers Watson

ANALYSIS www.insuranceday.com | Friday 26 February 20164

Underwriting on the front lineThe conflict in Yemen marks a fundamental paradigm shift in modern warfare and, as an inevitable consequence, changes the nature of the exposures faced by underwriters in the London market

Rasaad JamieGlobal markets editor

Now is one of the most challenging, as well as one of the most promis-ing, periods in the histo-

ry of the London political violence and war risks insurance market.

The ongoing civil war in Yemen is proving to be one of the most demanding underwriting envi-ronments for the market, with the outbreak of the conflict on the Arabian peninsula following hot on the heels of the wholly unfore-seen and unprecedented conflict in eastern Ukraine. It provides a stark reminder to the market, if any were needed, of the potential severity of such developments – the “unknown unknowns” in risk modelling jargon – with which underwriters are increasingly having to contend.

For Ben Lockwood, war and terrorism underwriter at Lloyd’s insurer Aegis London, events in Yemen (the de-facto overthrow of the Hadi-led government by Houthi forces loyal to the former president Ali Abdullah Saleh last year and, importantly, the sub-sequent brutal response by the Saudi Arabia-led and Western- backed Arab coalition of states under the guise of Operation De-cisive Storm) arguably mark a fundamental paradigm shift in modern warfare and, as an in-evitable consequence, the risks faced by London market insurers and reinsurers.

The way he sees it, the post-Iraq war fatigue in the West and the subsequent military disengage-ment from conflicts in the Middle East and north African (Mena) region, as exemplified by the re-luctance in the West to intervene in the conflicts in Syria and Libya, has helped foster a regional pow-er vacuum that has manifested itself in political volatility across the region, with some Arab states taking the unprecedented step of semi-independently taking mili-tary action in their own backyard.

“The geopolitical confidence on the part of Saudi Arabia and its al-lies to intervene in Yemen marks the most dramatic example in this shift of policy. But this leaves the unavoidable, fundamental ques-tion for any potential insurer –

what would be the outcome from a conflict fought with 21st century Western military technology, but based upon very different rules of engagement, military tactics and appetite for ‘collateral’ losses?

“The results have spoken for themselves, with countless re-ports of the likes of  hospitals, civilian factories, utility suppli-ers, refugee camps and densely population civilian areas being regularly hit by intense airstrikes – deliberately so and in blatant disregard for international law, according to numerous inter-national non-governmental or-ganisations,” Lockwood says.

Over the past year the conflict in Yemen has, in many ways, forced the insurance market fun-damentally to shift its expecta-tions of what would and would not be considered a legitimate target in this kind of environment and, as part of that process, shift the way in which it assesses what is or is not a relatively “safe” or viable risk.

“The answer appears to be that the rules of military engagement with which the market has be-come accustomed do not apply in Yemen and may not apply in future conflicts. As market losses filter through, lessons are being learned, but the implications for the London market’s war on land coverage in future conflicts re-mains to be seen,” Lockwood says.

War on land insurance cover is rarely purchased as a standalone product, but over the past few years become an integral part of broader political violence cover-age and is increasingly regarded as a core part of that particular offering by insureds. War on land cover was until recently regard-ed as inherently problematic for the market. For example, Lloyd’s underwriters were only allowed to write war on land risks in a  limited way in 1997 after an in-terval of some 60 years. Howev-er, Lloyd’s significantly eased the limitations on writing this line of business in 2011.

Growing marketJulian Kirkby, associate director for political violence in the non- marine division at Lloyd’s broker UIB, describes war on land cov-er as an important and growing market, albeit one still under-developed compared to other markets within Lloyd’s. There are,

he says, about 35 syndicates offer-ing specific war on land cover in London alone at present. In addi-tion, there is approximately $1bn of full political violence capacity (which includes war on land) for 2016, a figure which, Kirkby says, can be quadrupled if you factor in the capacity available in the terrorism insurance market. A handful of companies outside the Lloyd’s market also write war on land risks.

“It is a significant market and it’s growing. Some of the largest insurance companies in Turkey are looking to fac out more of their exposure due to the perceived in-ternal political instability. Cedants don’t want to retain the risk and they look to specialist brokers to assist them in their risk transfer. The same thing is happening in other parts of the world,” he says.

UIB has seen a number of com-panies enter the political violence insurance market over the past year or so. Some of them, Kirkby notes, with particularly aggres-sive appetites.

“We also know of other compa-nies that are thinking of adding a political violence string to their bow. This is because this line of business is making money. For many syndicates, the loss ratios are typically single-digit figures and this is despite the fact global acts of terrorism cost the world $53bn in 2014, which is marginally higher than the aftermath of the September 11 atrocities,” he says.

But the saturated marketplace keeps reinsurance rates low and UIB is seeing significant reduc-tions, typically of 20% plus, at each renewal. “Cedants send the same risk out to multiple brokers who battle it out with underwrit-ers to try and get the best deal. With all these dynamics, the mar-ket is tougher than it’s ever been. It’s hard enough maintaining your renewal book, let alone growing and developing new business. But that’s the nature of the market,” Kirkby says.

Lockwood also describes the de-mand for war on land coverage as significant and growing in many parts of the world. For example, premium income allocated to the Lloyd’s war on land risk code has more than doubled since 2010. However, he says, the challenges posed by this growth for Lloyd’s insurers are many.

“How to appropriately aggre-

gate potentially huge exposures and accurately price risks in the face of such uncertainty in an in-creasingly challenging and com-petitive market environment remain a core question for insur-ers’ portfolio management. There is also the challenge of making cli-ents aware of the underlying risk and encouraging them to purchase the most comprehensive cover in a pre-emptive manner, rather than waiting for a conflict to break out and facing an inevitable struggle to secure cover during times of war,” Lockwood says.

The exact scope of the insurance cover is, as always, an important issue for the insured, according to Andrew Grant, a partner with London law firm Clyde & Co, which advises property, political violence, war and terrorism un-derwriters on property and other risks in the Mena region including in countries like Kuwait, Iraq, Syr-ia, Libya and Egypt.

It is important to bear in mind, he says, political violence cover is much wider than just war on land, covering everything from ri-ots and civil commotions up to the larger-scale conflicts: insurrec-tions, revolutions and rebellions and on to war and civil war.

“It is perhaps these other perils that are of more significance to a buyer of cover, as losses tend to occur in the run-up to a war, which may take months, if not years, to gestate. By the time a

war is on foot, most companies have long since withdrawn their staff and, if they can, their assets,” Grant says.

“With the Arab Spring and the internal conflicts that arose in states such as Libya and Egypt, cover for civil war became in-creasingly important. There is now the challenge of the legacy of the Arab Spring, where the re-gimes that have replaced dictators are unstable and make countries like Libya unacceptable as risks.”

Adjusting the lossKirkby says civil war situations present a huge challenge to un-derwriters when they try to ad-just a loss, as it can often be very difficult and unsafe to get people into the affected site. “This was a new phenomenon when the Syr-ia crisis became a civil war about four years ago. You have the same challenge in Yemen, although to a lesser degree. Underwriters have been known to charge rates of 15%-plus on Yemeni business during 2015 but there have been some sizeable war on land losses,” he says.

Establishing the facts of any giv-en loss that has been said to have occurred in Yemen is probably the biggest challenge for the market, according to Grant. The country, he says, is often closed to Western investigators and most loss ad-justers are understandably reluc-tant to travel.

As a specialist aviation loss adjuster, McLarens Aviation is frequently called to attend losses on behalf of war and terrorism underwriters. In recent years, the company has dealt with  losses in a number of conflict zones includ-ing Iraq, Libya, Afghanistan and Mali. Trehane Oliver, business development director at McLar-ens Aviation, says the company has over the years developed a specific response infrastructure and procedures which take into consideration the added compli-cations that operating in hostile environments bring.

“The main implications of these types of losses are the logistical challenges that can arise. In times of hardship, managing expecta-tions and controlling claims can be complicated. Moreover, the prac-ticalities and logistics of dealing with such claims, particularly in warzones, is much more difficult when you have surveyors flying out for site visits. In these challeng-ing locations, a knowledge of local conditions is critical. What this means is it’s most likely to be those specialist adjusting businesses with sufficient international reach that are best placed to handle such claims,” Oliver says.

He points out with any of these losses, particularly when there are multiple covers, there will be a review of the various policies to ascertain what is covered and in which location. “This can cer-

tainly be complicated by war and volatile events. However, in our experience, it is something the industry is used to dealing with,” he adds.

But despite the familiarity, de-termining the cause of a particu-lar loss and where that loss falls within the scope of a particular insurance policy remains a chal-lenge for insurers, even more so in politically unstable environ-ments. Grant says the   property market excludes losses arising from the perils of war and ter-rorism and therefore those perils are covered in the terrorism, war risks and the growing  political vi-olence insurance market.

“It has always been an issue of construction as to the true cause of a loss and whether it falls to the all risks property insurers or is excluded and would fall to terrorism/political violence underwriters if such cover has been bought.

“The proxy wars being fought in Yemen and Ukraine by outside nations do lead to some blurring of the boundaries and increase the difficulty of establishing the true nature of a cause of loss,” Grant says.

But while exclusions in prop-erty policies for war risks have been around for many years, the definitions of such perils in po-

litical violence covers have been drafted more recently and don’t always dovetail with the exclu-sions in property covers.

“Hence, in circumstances where a loss has occurred due to violence, perhaps on a lower scale than the level of violence associated with a war – for exam-ple, rioting or civil commotion, which is often the precursor to a civil war – there may well be overlap in cover. Equally, groups such as Islamic State, with or-ganised military and probably state-backed funding, aren’t the common terrorist cells or groups that have been seen in the past,” Grant says. n

www.insuranceday.com | Friday 26 February 2016 5

Smoke rises from burning buildings during clashes between Sunni militia and Hawthi Shiite rebels in Sanaa, Yemen

© 2016 Hani Mohammed/AP

Aegis London’s Lockwood says there will inevit ably be variations in the interpretation of events depend-ing on the perspective from which any event is seen. “Take the conflict between Israel and Hezbollah that periodically flares up; are cross-border rocket attacks by Hezbollah an act of ‘terrorism’, an act of ‘war’ or something else? Or the conflict in eastern Ukraine; are the rebels engaged in ‘civil war’, is it an inter state ‘war’ thanks to their Russian backing, could it be defined as an ‘insurrection’ or are they simply ‘ter-rorists’? It all depends on perspective, which is often politically motivated,” he says.

“So the broad market trend has been to ensure coverage is in force regardless of subjective inter-pretation by encouraging clients to purchase full- spectrum political violence cover, thereby side-lining arguments of interpretation.”

UIB’s Kirkby says clients in areas of the Middle East that are unlikely to be exposed to war or civil war will therefore choose not to buy full political vi-olence protection whereas others in parts of in the Middle East are wisely advised to buy full political violence cover. It is important for clients with assets in conflict zones to understand the coverage they are buying and not to, for example, strip-out war perils to save on premium spend as they may find themselves without cover.

Clients also need to ensure that they do not com-promise themselves by not adhering to the policy conditions such as non-disclosure, Kirkby adds. “We have heard of reinsurers contesting claims where clients have failed to advise their insurance company of a material fact, such as a threat made against them, an attack on a neighbouring property or where the property is no longer in the control or possession of the insured.”

Lockwood says he sees little prospect of the lines between international property all-risks and polit-ical violence risks being blurred over the next five years, as continued geopolitical un certainly is likely to discourage the all-risks market from expanding the scope of its coverage.

“Market experience and continued troubling on-the-ground events have shown the folly of offering coverage for broad political violence without the necessary in-house expertise; any move to throw in and retain this coverage with unrelated perils would be an extremely risky venture,” he says.

“It could prove true to say some direct insurers in the Middle East will increasingly package the risks

together in a move to capture income and market share in a very challenging market environment, but the fundamental requirement for the global centre of excellence for political violence reinsur-ance to support this – Lloyd’s – will undoubtedly re-main as strong as ever,” Lockwood adds.

Although recent events in the Middle East point to a change in tactic from the large property losses of the past to synchronised attacks on people, the threat of attacks on property will not go away, Kirk-by says.

“Sadly, the Middle East is more unsettled now than it has been for a generation and no-one can predict where the next Syria will be. There is an abundance of capacity in the market at present, which keeps rates low other than for particularly distressed ar-eas of the world, conurbations or central business districts where there is a high concentration of ex-posure,” he says.

“I think the market will remain soft but rates may start to stabilise in certain territories to some de-gree. The market will continue to develop with new product offerings, although I think some existing players will fall by the wayside, as it will only take a few large losses to close some books.”

According to Grant at Clyde & Co, companies will no doubt want cover for political violence perils if they are investing in the Middle East or other conflict-rid-den regions of the world. “There are certain areas where cover is no longer available – Syria, northern Iraq, eastern Ukraine – but these are now conflict zones where there is little, if any, investment or devel-opment. The legacy of the Arab Spring remains, and with the spread of Islamic State across northern Afri-ca, there is a demand for cover in other regions.”

Lockwood is a touch more optimistic. He says Aegis London is actively targeting and writing war, terrorism and political violence risks covering cli-ents from all industry sectors in states across the Middle East and beyond. The only exceptions for Aegis are states, entities and individuals subject to international sanctions.

“As part of a successful broader plan for profit-able growth, we have consciously extended our un-derwriting focus from some of the seemingly more benign parts of the world such as North America and western Europe to the Mena region and we continue to build an underwriting team with lead-ership expertise and experience in that part of the world,” he adds. n

Open to interpretation

“The rules of military engagement with which the market has become accustomed do not apply in Yemen and may not apply in future conflicts”Ben Lockwood Aegis London

“The proxy wars being fought in Yemen and Ukraine by outside nations do lead to some blurring of the boundaries and increase the difficulty of establishing the true nature of a cause of loss”Andrew Grant Clyde & Co

“We know of companies thinking of adding a political violence string to their bow… for many syndicates, the loss ratios are single-digit figures”Julian Kirkby UIB

INSIGHT www.insuranceday.com | Friday 26 February 20166

Culture vulturesThe insurance industry often gets the numbers right in mergers and acquisitions, but frequently stumbles on cultural obstacles

Pierre Fels and Jenni HibbertHeidrick & Struggles

It is no surprise that insur-ance companies excel at understanding the panoply of risks faced by their cus-

tomers. After all, accounting for what can, has, or might happen is a core part of the business. Yet when it comes to mergers and acquisitions (M&A) many insur-ance companies only excel at half the job: assessing the risk of a potential takeover and expert-ly crunching the data. The other half – identifying cultural clashes that could scuttle integration – is often neglected.

After a deal closes, and even during negotiations, insurance companies must move beyond the numbers and decide how, or even whether, to bring the two cultures together.

Our experience and research shows many deals in cross- border M&As in the insurance sector founder in relation to cultural issues. Too often, the industry views cultural differ-ences as operational matters that can be hammered out, rath-er than behavioural differences that require a more considered approach. Boards of directors, which scrutinise the rationale and costs of a merger, often fail to consider cultural issues or

monitor post-merger integration. As the global insurance sector consolidates and the number of deals increases, a keener under-standing of how merging cultures can (and do) clash will become more important for success.

To look deeper into the challenge of cultural integration following M&A, executive search firm Heid-rick & Struggles talked with senior insurance exec-utives experienced in acquisitions in Asia, Europe, and North Ameri-ca. Most agree clearer commu-nications and an active approach to identifying and ad-dressing cultural issues can improve the val-ue captured from M&A, yet many admit they over-look it.

One executive said at his organi-sation several trans-actions were led by people who never visited the target company or its market, and had little local knowledge. “Having bought assets, we expect-ed local market leaders who were new to the group to adopt our cul-ture off the back of a series of writ-ten protocols and the occasional visit to London,” he said. “We sel-dom asked them about the nuanc-es of their marketplace.”

Ensuring culture is top of the agenda will become increas-ingly important as the industry continues to rebound from the 2008 economic crisis. A study by Swiss Re reported 489 M&A deals were completed globally in 2014. Although the volume remains well below the pre-crisis peak (of 674 deals in 2007) the insur-

er concluded that indications “suggest that momen-

tum behind M&A is building”.

In a separate study, Deloitte found the num-ber of deals in-

volving brokers grew 40% from

2013 to 2014. Al-though in Deloitte’s

counting, deals involving under-writers edged lower from 2013 to 2014, the average val-

ue per deal al-most tripled, from

$124m in 2013 to $359m in 2014.

Indeed, 2014 saw the an-nouncement of eight insur-ance M&A deals with values of more than $1bn, dwarfing the volume of big-money deals in previous years. The largest trans-action was the $8.8bn takeover of Friends Life by British insurer Aviva, creating the largest insur-er in the UK.

The power of cultureWhile M&A is driven by a range of underlying strategic objectives, those with the greatest potential look beyond pure cost efficiencies. Success is drawn not just from spreadsheets, but also from cultur-al integration that produces better collaboration and new ideas.

Such cultural integration can take several forms. The parent company can absorb and domi-nate the culture of the acquired company (perhaps the most com-mon form); the two cultures can co-exist, with the acquired com-pany retaining a certain level of autonomy; or the two cultures can intermix, creating a new and hopefully more ideal corporate culture. Regardless of the form that cultural integration takes, the evidence suggests that insurers everywhere find it challenging: for example, 39% of respondents in a 2016 Towers Watson survey of 750 global insurance executives cited “overcoming cultural and organisational differences” as a post-integration challenge.

Yet when companies get cul-ture right, the benefits are sig-nificant. The 2004 merger of US insurers Anthem and WellPoint Health Networks is a clear ex-ample. Soon after the $16.5bn merger was approved, Larry Glasscock, chief executive of the new company (now called An-them), made it clear the merger signaled the birth of a new com-pany and a new culture, rooted

in internal trust and innovation.Glasscock first delivered the

message to a newly formed exec-utive leadership team, comprising 15 leaders from both companies, then to 300 top managers in the new company, and finally to its more than 40,000 employees. Eventually the new culture would permeate every aspect of the new company, from hiring and orien-tation to performance manage-ment. By 2007, the company was named by Forbes magazine as one of the most admired companies in the US, had cut administration ex-penses in terms of share of over-all revenue and was on track to reach its growth targets.

Which integration model is best depends on a variety of factors, such as the relative size of the two companies, the optimal organisa-tional structure after the merger, and the value created by various cultural characteristics. But iden-tifying the right model is a crucial element of any M&A process. By planning strategies for assimila-tion with the same fervor as those for operational efficiencies, in-surance companies can lower the risk of failure in M&A.

Early startSpotting and addressing cultur-al challenges should start well before the papers are signed. Parallel to due diligence, acquir-ing companies should critically compare attitudes, work habits, customs, and other less overt characteristics of the two compa-nies involved. The effort should be a routine part of the standard M&A process, rather than an ad hoc response if friction develops.

One useful tool for comparison is the corporate-culture profile, a diagnostic instrument based on survey data from both com-panies. Such surveys explore a range of corporate character-istics, such as attitudes toward personal accountability and col-laboration, trust levels, and in-tegrity. They also gauge strategic alignment and commitment and assess the strengths and weak-nesses of each culture. A corpo-rate-culture profile can quickly identify areas in which two cul-tures diverge, pinpoint areas that may require immediate at-tention, and highlight areas of common ground that should be recognised and celebrated.

Our conversations with insur-ance executives who are experi-enced in M&A highlighted specific themes that arise during negotia-tions around geographic location, management level and mind-set. These concerns should be includ-ed in the process to lower the risk

Several factors are contribut-ing to increased M&A activity in the global insurance sector, but most consider the main im-petus to be overall lower pre-mium rates. Lower rates are seen as a byproduct of overca-pacity, and the industry is con-solidating to retain profitability and increase differentiation.

Other factors include grow-ing interest in insurance M&A from a broad range of backers, including hedge funds, private equity, and international inves-tors. Companies are looking for ways to use vast cash reserves. A strong US dollar has made some cross-border deals less expensive for US companies. And insurers are recognising the need for economies of scale, particularly as the costs of IT and system changes mount.

In addition, many companies in Asia are moving into global markets and looking for strate-gic acquisitions to drive their expansion plans. For example, in 2013 Sompo Japan Insur-

integrating the newest technol-ogies, like mobile applications and big data analytics, as a core component of a company’s busi-ness model, either to reach cus-tomers, provide market insights, or improve internal efficiencies. Such mergers are especially prone to cultural clashes as staid insurers butt against dynamic, high-tech entrepreneurs, often

extinguishing the very spark that created value in the ac-quired company.

And finally, in a reflection of the industry’s positive outlook, outside investors are also turn-ing to the sector as a channel for steady yields. In one example, in 2014 the Canadian Pension Plan Investment Board acquired the US-based Wilton Re for $1.8bn. n

Doing a deal

of cultural clash in an acquisition.In general, workers at an ac-

quired company understand – and sometimes fear – that job cuts are possible. Painting too rosy a picture ahead of a deal could cre-ate tensions later when reality hits. “Be honest from the outset,” suggested a senior manager at a European insurer. “You’re buying a business for their book, and you need to cut costs.”

Honest communication during negotiations and due diligence can help expose attitudes toward potential job cuts and identify any measures that are seen as off lim-its. When a global company negoti-ated a takeover of a Malaysian life insurer, the acquirer presented a clear plan for adjusting leadership roles, pointing out gaps and ex-plaining how they would be filled, said an executive close to the deal. The plan was presented at meet-ings to ensure alignment. “The acquirer needs to understand and respect non-negotiables relating to culture and not just look at the numbers,” this executive said.

Open communications at this stage can also create a clear pic-ture of how integration will be handled if the takeover is complet-ed. For example, acquiring compa-nies often promise a short period with no major changes immediate-ly following an acquisition. This interval allows senior executives and staff at both companies to be-come better acquainted and can help produce a more appropriate integration plan for capturing the full value of the merger.

Creating a collaborative atmo-sphere – one that does not alienate staff at the company being ac-quired – begins with first impres-sions. Companies that tout their superiority or power can find cul-tural integration more difficult. In one case, the due-diligence team from a US acquirer flew into Asia on private jets, stayed at the best hotels and boasted of their life-style to staff at the target compa-ny, creating emotional distance between them.

“Historically the insurance buy-ers have an absorb-and-impose approach to culture,” a top execu-tive at a Japanese insurer said. “US companies are known to be the worst acquirers. They generally look at immediate financial results and key performance indicators rather than the long-term picture. Buyers will tend to focus on pro-tecting their core headquarters’ market first and other regions are at the bottom of the list.”

Throughout the acquisition process, staff at the targeted com-pany should be treated as any other corporate colleague. Cor-

porate hierarchies and chains of command exist, of course, but when they are the defining as-pect of personal relationships, staff at acquired companies can become more anxious and less collaborative, posing an obsta-cle to integration. One executive observed, “Nothing raises hack-les more than feeling you have been absorbed into a large and seemingly uncaring behemoth when, up until a few weeks ear-lier, you were top of the tree in your local market.”

ExecutionIf efforts before the deal can be seen as cultural intelligence-gath-ering, those after the deal fo-cus on execution. After all, each integration effort is unique in its cultural aspects. A company may have a standard approach for combining product service lines, for example, but bringing staff members with diverse back-grounds together effectively re-quires a tailored approach.

For years, French insurer Axa followed a generally successful pattern that it rigorously applied to its M&A activities. Conversion in some areas, such as branding, corporate values, shared services, and IT infrastructure, were not up for negotiation, but acquired companies were allowed greater flexibility in others, according to

a former country leader for Axa. But even Axa’s template is be-ing tested by today’s volatile and highly competitive market.

Our experience and discussions with insurance executives show that there are several points that are helpful to keep in mind during this phase of a takeover.

In many takeovers, cutting costs (and jobs) at the acquired compa-ny is one of the first priorities. But moving too fast can cause unnec-essary friction and inadvertently force valuable talent out the door. By taking a long-term view of the value potential of an acquisi-tion, companies can take the time needed to understand cultural dif-ferences, and then focus only on those that may directly prevent the company from reaching its goals. As two businesses merge, it is natural for workers to become protective of their positions, and even paranoid about their future. The acquiring company must take pains to demonstrate any cuts to

duplicated roles will be decided based on merit, rather than inter-nal connections.

Some insurers can be very de-liberate with any changes they make to an acquired compa-ny over a long period of time. Some companies can spend the first three or four months after an acquisition getting to know how the new company works, using measures to help pinpoint where a company’s legacy cul-ture might interfere with busi-ness objections. For example, if lower-level managers say they simply follow their boss’ orders, there could be a misalignment on staff empowerment that could reduce innovation and block flows of information.

Once a decision is made to cut staff or to take another signif-icant step, the acquiring com-pany should act quickly and completely. Drawing out painful measures only accentuates lin-gering staff anxieties and delays the return to normalcy.

The importance of clear and honest communications contin-ues into the integration phase, and indeed beyond it as a matter of course. New structures or other big changes should be broadcast quickly and widely to prevent destabilising rumors from tak-ing hold. Any messages about up coming changes should be

non-ambiguous and professional, especially for measures that could be perceived as negative. There is no good time for bad news, yet un-certainty is often more corrosive than the reality.

The global insurance sector appears ripe for a new wave of consolidation as companies in-vestigate entry into new markets and access to new technologies. As they pore over the numbers and explore the strategic ra-tionale behind various moves, would-be dealmakers should also take stock of culture.

Industry leaders have long been excellent at weighing the financial risks and rewards of an acquisition, but they often fall short when considering the cul-tural aspects – if they consider culture at all. Cultural differenc-es, however, can often ruin an otherwise well-planned acqui-sition. By purposely including culture into the process during negotiations and after the deal is signed, companies can improve their odds of success. n

Pierre Fel is a principal at executive search firm Heidrick & Struggles’ Singapore office and a member of the global financial services practice. Jenni Hibbert is a partner in the London office; she leads the UK financial services practice

ance bought UK-based Canopius Group, and in 2015 Mitsui Sum-itomo Insurance (MSIG) bought Amlin. And among the recent deals originating from China, Fosun International bought Bermuda-based Ironshore in 2015, and in 2016 China Min-sheng Investment was finalising its acquisition of UK-based Sirius from White Mountains.

Against this background, insur-ance companies are pushed to-ward M&A for a variety of reasons. The most common, still, is to bring together two companies with com-plementary businesses and strat-egies and capture greater value through scale efficiencies.

Other strategic goals are also driving deals, for example, at-tempts to harness digital tech-nology and reinvigorate tired corporate business models. In one case, US insurer Aetna in 2014 bought technology provider bswift, which offers cloud-based insurance exchanges and other digital products, for $400m.

These types of deals focus on

Integrating different cultures after a merger between companies is crucial to success

489M&A deals

completed globally in 2014, according

to Swiss Re

$359mAverage value per underwriter deal

in 2014, according to Deloitte

39%Percentage of respondents in Towers Watson survey of 750 executives who said ‘overcoming cultural and organisational differences’ was a major post-integration challenge

Mitsui Sumitomo: Japanese company

bought Amlin last year

www.insuranceday.com | Friday 26 February 2016 7

RSA shares surge 12% as full-year profit soars 43% Chief executive Stephen Hester hails growing value and prospects as turnaround reaches completion

Michael FaulknerEditor

RSA group chief exec-utive, Stephen Hes-ter, said the insurer is “more valuable” now it

was than six months ago when Zurich made an abortive bid to buy the business.

Speaking yesterday as the insurer unveiled group operat-ing profit was up 43% to £523m ($728.4m) for 2015, Hester said RSA is now in a position to “pros-per independently”.

Shares in RSA soared 12% in yesterday morning’s trading.

He said the turnaround phase of the group’s action plan com-menced in 2014 was “largely complete” and there were “good prospects of substantial further performance improvement”.

Hester said RSA had received no further approaches from prospec-tive buyers after Zurich dropped its 550p per share offer last year. But he could not rule out further approaches being made.

“The company is stronger than it was when talking to Zurich – and more valuable,” he said. “We believe strongly RSA can prosper independently, indefinitely into the future; and we can exceed this [550p per share] valuation on a standalone basis.

“With our strategic restruc-turing largely complete, RSA is a strong and focused international insurer,” he said.

RSA announced yesterday that it is accelerating its cost-saving programme, increasing its annual gross cost savings target to more than £350m by 2018.

It also increased its underlying return on tangible equity expecta-tion to the upper half of its 12% to 15% target range by 2017.

The group reported strong

underlying results across Scan-dinavia and the UK and record underwriting profit in Canada.

The UK business booked a £12m underwriting result de-spite the £76m losses from De-cember’s storms.

The troubled Ireland business made an operating loss of £26m, much reduced from the 2014 loss of £97m loss. RSA said it expected

to reach operating profit in 2016.Group underwriting prof-

it rose to £220m from £41m in 2014, with a 2.8 percentage point improvement in the combined ratio to 96%.

Overall group net written pre-miums were down 3% to £6.8bn, driven mainly by the group’s dis-posal programme.

For the 2015 accident year,

underwriting profit rose to a record £129m, compared with £73m in 2014.

Hester said the group’s strate-gic restructuring will complete in 2016 as the remaining contracted disposals close.

During 2015 disposals in Hong Kong, Singapore, China, India, Italy and UK engineering were completed. The disposal of it op-erations in Russia completed af-ter year-end. The £403m sale of RSA’s Latin American operations is scheduled to complete in stages over the next six months.

Total agreed disposal proceeds to date now stand at £1.2bn.

“We see 2016 as the last ma-jor restructuring year with dis-posals and balance sheet work completing and the heavy lifting of core business improvement and cost reduction action con-tinuing,” Hester said.

RSA reports Solvency II capital ratio of 143%RSA has become the latest insur-er to disclose its capital ratio un-der Solvency II, reporting a ratio of 143% at year-end 2015, writes Michael Faulkner.

The insurer said the sale of its Latin American unit, which will close this year, would increase the coverage ratio to 155% pro forma. RSA said it was targeting a ratio of 130% to 160%.

Other European insurers have been disclosing their Sol-vency II ratios as they report year-end results.

French insurance giant Axa, which had reported a Solvency II ratio ahead of the regime go-ing live, said yesterday its year-end 2015 ratio was 205%, up four points from the end of 2014.

Last week, Allianz said its Sol-

vency II ratio rose to 200% at the end of 2015, compared to 191% a year earlier. It attributed the rise to “active risk management”.

In January, Prudential became the first UK insurer to report its capital ratio under the new Sol-vency II rules, which came into effect on January 1, 2016.

Prudential said its estimated group Solvency II surplus at June 30, 2015 was £9.2bn ($13.06bn) under its internal model, before allowing for the 2015 interim dividend, with a solvency ratio of 190%.

Experts have said investors should expect Solvency II ratios to be lower than under the previous solvency rules.

Jim Bichard, UK Solvency II leader at PwC, said the majority

of insurers would report ratios of between 100% and 200%.   “The market will have to get used to 150% to 200%, and some are go-ing to be 130% to 140%,” he said.

Solvency II requires insurers to calculate their capital require-ments based in their underwrit-ing, investment and operational risks. A Solvency II capital ratio of 100% or more shows the insur-er has sufficient capital to cover these risks.

While Solvency II is similar to some previous European solven-cy regimes, such as in the UK, it has some major differences, such as the addition of a risk margin and the inclusion of certain ad-justments to dampen the effects of market volatility, which can lead to different capital ratios.

Marketform exits general liability businessSpecialist Lloyd’s under writer Marketform said yesterday it will cease to write general liability business, writes Michael Faulkner.

The decision forms part of a broader strategic review of the business by new chief executive, Martin Reith.

Marketform said general li-ability business did not fit with the group’s longer-term strategic vision.

The carrier said it would con-tinue to operate a full claims service for existing clients and will retain two dedicated under-writing professionals, with both a box and office presence. This will be administered under the leadership of Ian West, head of financial and professional lines.

Industry veteran Reith was parachuted into the top job at Marketform, which is owned by Great American Insurance Group, at the end of last year, with the task of improving the carrier’s profitability.

Reith said: “We did not take the decision to exit general liability lightly; however, as part of the on-going strategic review of the busi-ness, we concluded this line no longer fits our longer-term plan for Marketform.

“Importantly, we will maintain our commitment and service ex-cellence to clients with existing policies while more broadly we are excited about the opportuni-ties for growth we see across oth-er lines,” he added.

“We did not take the decision to exit general liability lightly; however, as part of the ongoing strategic review of the business, we concluded this line no longer fits our longer-term plan for Marketform”Martin ReithMarketform

Stephen Hester, RSA chief executive: said the company is ‘more valuable’ now than when it was talking to Zurich six months ago and is ‘a strong and focused international insurer’