Insurance Mergers Complicated by Economy, Low Valuations, Hidden Risks

November 15, 2010

With organic growth difficult in the current economy and soft market, there could be an increase in insurance industry merger and acquisition activity over the next 12 to 18 months, according to mergers and acquisitions experts.

But the experts at global services firm Towers Watson believe the uptick in M&A will only happen if the industry can come to terms with some of the fallout from the global financial crisis, including the low valuations many insurers have been given.

Executives are not keen about selling when valuations are low, points out Bruce Fell, property and casualty sales and practice leader for the Americas for Towers Watson.

“I think there’s a broad belief that depressed valuations are temporary, that stock values will turn around. I think they do have to be concerned,” Fell told Insurance Journal in part 1 of a two-part podcast on the M&A landscape and management issues.

“[T]here’s definitely a more heightened concern around exposure or liability to directors and officers in that if they make a decision and agree to sell their company, stockholder class action lawsuits are pretty commonplace now when acquisitions are announced. So I think that that’s definitely an inhibitor.”

But, according to Fell, there are M&A opportunities for those property/casualty insurers that have been able to retain their valuation in the market. He thinks that the industry could begin seeing those companies acquire insurers that are not as strong, particularly smaller-sized players.

“I think where the opportunities exist are for companies that have been able to maintain a bit of a stronger valuation in the current marketplace. They have a strong acquisition currency from that standpoint and now is, from that standpoint, a great time to acquire because valuations are lower across the board,” Fell told Insurance Journal.

Fell believes that one of the reasons the current M&A environment favors larger carriers is the popularity of predictive modeling in pricing.

“In the personal lines, it’s already much more entrenched in using predictive modeling. One of the things with predictive modeling is that you definitely need large organizations with large amounts of data in order to perform the analyses necessary to get a good indication of what prices are,” Fell adds.

Commercial lines writers are also moving toward predictive modeling for workers’ compensation, small commercial and other segments where there’s good external data that can supplement a company’s internal insurance loss data. This, too, augurs well for larger companies in the area of M&As.

Fell thinks smaller companies are definitely going to find themselves at a disadvantage because “either they’re not doing the modeling because it’s a fairly expensive endeavor… or even if they try to do it, they may not have enough information to get it right. So I think they’re going to become more prey to the larger companies.”

Hidden Risks, Corporate Culture

Companies, large or small, that are interested in a merger are certain to look closely at valuations, at the strategic fit, and at whether all the financial numbers make sense.

But companies sometimes make the mistake of underestimating operational, cultural and integration issues that can affect the success of a transaction over time, according to Mary Cianni, also of Towers Watson.

Cianni says it’s easy to forget that it is the people in an organization who drive customer relationships and productivity.

“[A] lot of people think of culture as being soft– about how people feel, do people wear blue jeans on Friday, for example… [but] … it’s really about the business and management processes and the way things get done in an organization that defines what the culture is,” says Cianni.

Cianni, global leader for mergers and acquisitions in the New York office for Towers Watson, discusses some of the hidden risks in mergers in the part 2 of the podcast with Insurance Journal.

Corporate culture reflects corporate strategy, she says.

“[O]ur research would show that culture is very much linked to what the strategic priority is for an organization. So you might find, if you think about what makes sense for an insurance company– let’s say efficiency– that there’s a greater focus on discipline, very clear processes, much more of a data‒driven type of a culture than you might find in a culture, let’s say, that’s striving for innovation,” says Cianni.

On the other hand, a culture that’s focused on customer service may have information flowing more freely so that employees know what’s going on from a customer perspective, or authority may be more local so that decisions are made closer to the customer than in a company with a different type of culture, Cianni notes.

Employee Retention

According to Fell and Cianni, managing corporate cultural issues is important for many reasons, not the least of which is retaining key employees.

Towers Watson’s own research shows that high performing employees are two times more likely to start looking for another job during a period of merger and these employees are often driven by questions about their working environment.

“Oftentimes the things that create that disengagement and that willingness to look have to do with cultural aspects: ‘What do the leaders look like?’ …’What’s my work environment like? ‘What’s my experience with my direct manager?’ ‘How will communication and information be shared?’ And those are all things that are reflective of a culture,” Cianni says.

Culture issues also arise when there is a merger that crosses borders.

“If you have a situation where, let’s say, an operation within the U.S. is purchased by a foreign acquirer, and that foreign acquirer doesn’t have existing operations within the U.S., you probably are going to have less of the cultural issues amongst the majority of the organization,” The senior management will clearly feel it because now they’ll be responding to a new buyer, new owner, who may have a very different cultural philosophy, but the rank‒and‒file of the organization oftentimes won’t feel it,” says Fell.

“On the other hand, if it’s a situation where the foreign acquirer already has existing operations here in the U.S., then you’re going to definitely have much more of that cultural component to really work out and to make sure that you get it right.”

Towers Watson employs several different corporate culture surveys in its consulting.

“[T]he first step is identifying and defining what are the current cultures,” according to Cianni. “The second piece is then for the leadership to really sort through what are the things that really matter in terms of the new company going forward, for the newly merged company, or, if it’s a serial acquirer, what are the things that really matter in terms of the way they go about doing business, and then identifying how are they going to actually engage the employees to understand what that new culture will be going forward.”

To listen to the complete Towers Watson interview on mergers and acquisitions and their hidden risks, visit

Insurance M&A Landscape, Part 1: Today’s M&A Opportunities
Where are merger opportunities for property/casualty insurers? From Towers Watson in Philadelphia is Bruce Fell, property and casualty sales and practice leader for the Americas. Joining him is Mary Cianni from New York, where she’s global leader for mergers and acquisitions.

Insurance M&A Landscape, Part 2: Hidden Risks
Bruce Fell is property and casualty sales and practice leader for the Americas for Towers Watson in Philadelphia. Joining him is Mary Cianni from New York, where she’s global leader for mergers and acquisitions. In this Part 2, Fell and Cianni discuss some of the hidden risks in mergers, including those associated with merging different corporate cultures and how these issues can be managed.

Topics Mergers New York Property Property Casualty Casualty

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