Aquisition Integration for Logistics and Cargo Insurance

chess-game
During my 36 years in the marine insurance industry, one of the most common issues has been failure to properly integrate acquisitions into cargo logistics insurance programs—which can result in gaps in cargo insurance coverage. Old habits die hard, however, and this is particularly true in logistics operations.

When an organization acquires a new company, there is a choice. The buyer can allow the acquisition to continue to operate independent of its logistics program (rarely is cargo insurance left independent) or fully integrate them into the buyer’s logistics and cargo insurance programs. The most common occurrence is full integration into the buyer’s logistics and cargo insurance programs for cost savings and continuity.

If the independent logistics option is chosen for the acquisition, it is still critical to perform a detailed gap analysis of the logistics SOPs (Standard Operating Procedures) used by the acquisition to assure their program does not present unique exposures not currently considered or addressed in the buyer’s program. The most objective and effective gap analysis should be performed by an outside consultant working with the buyer’s designated logistics representative.

A risk management representative is not required but may wish to attend. The consultant must have extensive experience in logistics audits as well as a clear understanding of implications of the terms and conditions of the cargo policy. This team will create a gap analysis report that details variances from best practices and the key drivers in the buyer’s logistics program that are critical to the marine cargo insurance program. This also allows the buyer’s cargo program to be adjusted for any unique requirements of coverage by the acquisition to assure there are no coverage gaps.

Importance of SOPs
It is worth a moment to address SOPs for logistics and security for shipping and storing goods in the due course of transit. Formal SOPs are critical to assure compliance, and proper measurement of compliance. SOPs also provide continuity of logistics’ programs so learned processes and shipping lane specific issues are not lost when there is a change in personnel.

In instances when the buyer decides for full integration, the process is much the same as described above for the independence option for logistics by the acquisition. The most important difference is that the gap analysis details the variances between the acquisition and the buyer’s logistics program SOPs and rates the findings into levels of importance for timely adoption; critical, second tier and third tier variances. The critical issues require adoption as soon as possible while the other variances can be corrected over the course of time.

It is important to complete a followup audit(s). If there are critical issues, a followup audit might be completed after the buyer has been advised that the critical variances have been finalized, to independently confirm compliance has been obtained if deemed appropriate. Regardless, a one-year audit is recommended to examine all the variances in the gap analysis to determine the level of compliance to correct all originally identified variances.

Again, old habits and processes die hard. You will often hear, “We always did it this way.” It is important during the gap analysis to integrate local issues required as needed, as long as it does not compromise the goal of the SOP. The integrations, especially acquired foreign companies, can be difficult, involving politics by other units of both companies outside of the logistics, security and risk management units. It is critical that senior management of both the buyer and the acquisition company have “full buy-in” on the integration process to overcome the political infighting that can develop.

The best analogy of this process would be a chess game—complex and variable with many moving, interrelated parts.

Is Bigger Really Better? Pros and Cons of the Reinsurance Industry’s Recent M&A Wave

The reinsurance industry has recently seen a rise in mergers and acquisitions among some of its biggest players, such as Axis Capital Holdings Ltd. and PartnerRe Ltd. Faced with challenges like soft market conditions and impending regulation around the globe, many companies have turned to consolidation. Case in point: In 2014, acquirers spent $17 billion on property and casualty, multi-line insurance and reinsurance deals – the most since 2011, according to data compiled by Bloomberg.

Claude Lefebrvre, chief underwriting officer at Hamilton RE, described M&A as part of a cycle that tends to take place during the soft market. Last year, about 390 insurance transactions were announced for a combined value of almost $50 billion, making it the busiest year for deals since 2008. This begs the question: Is bigger actually better?

At a recent roundtable in Bermuda, a group of executives talked about the pros and cons surrounding the current spate of mergers and acquisitions in the reinsurance and insurance markets. The discussion noted that M&A may not be as beneficial to the reinsurance market as previously conceived, and looked specifically at the long-term benefits (or lack thereof), the potential for culture clashes among merged organizations and the impact of investors.

Here is what some of the conversation entailed:

Long-term benefits of M&A

With a rise in the number of consolidations, many smaller reinsurance companies are under pressure to make a deal sooner rather than later. But does this ultimately increase shareholder value, especially in cases of like-for-like companies?

Brenton Slade, chief operating officer at Horseshoe Group, believes there would be far less M&A activity if management teams took the time to look at the rationale behind the proposed deal and how it would benefit shareholder value over the long term. With this strategy, he believes we would see more money being returned to investors or being deployed into new product lines as opposed to just expanding equity bases.

As stated by Robert Johnson, president at Aon Benfield Bermuda, being a company with $10 billion of capital does not necessarily provide access to much more business than being a $5 billion size company. Potential challenges, such as ensuring companies have the right synergies and the loss of good employees, may outweigh the benefits of a merger.

Culture Clashes

A major issue seen with the rise of mergers is combining two company cultures and their legacy systems into one cohesive unit. A recent study from Xuber showed that cultural integration and incorporation of multiple systems was the biggest challenge faced by companies following M&A.

Issues such as determining what team members stay on, what the company will be called and where the company will be based are huge decisions and can cause a great deal of tension. The integration of existing data systems, legacy systems, contracts and processes is just as challenging.

Companies need to take culture into consideration when acquiring another organization and determining how they will mitigate issues that arise. This can also be used as an opportunity to refresh old legacy systems and integrate new data storage systems to replace outdated technologies.

Additionally, it poses an opportunity for smaller companies to have an advantage when it comes to the M&A process, as they have fewer systems in place and can adjust easier. Smaller companies are also at an advantage when larger companies merge, as they can capitalize on dislocated teams and bring in new lines of business.

Investor Impact

Some believe that investors, and their desire to increase their capital base, are driving much of the current M&A activity. Previously, investors wanted to manage performance; this has changed dramatically as investors have become less focused on performance or meeting certain return or risk policies. Now investors are less involved and often do not understand the reinsurance industry. They are simply looking to increase the size of companies and in turn their capital base, without looking at the long-term impact of consolidation or the benefits of having two smaller companies.

Will Things Keep Getting Bigger?

Bloomberg predicts that we will continue to see a rise in M&A activity as the demand for bigger and more diversified portfolios increases and companies see it as the only option to remain competitive. Smaller companies will likely feel the pressure to become involved and see it as the only way of securing any kind of substantial future.

On the other hand, this may present an opportunity for smaller companies to shine. As their larger competitors struggle with the challenges brought on by the M&A process and are not able to focus on day to day activities, smaller companies can produce higher quality work and scoop up some of the larger company’s lost talent.

The debate will likely continue as to whether the pros outweigh the cons, or vice versa, in the recent spate of M&A activity in reinsurance and insurance. It is yet to be seen that we can truly prove bigger is better. What do you think?

Soft Market Conditions Present Biggest Challenge for Reinsurance Industry, Survey Finds

Ongoing soft market conditions are the most widely-cited challenge facing the global reinsurance industry in 2015, according to a global study of reinsurance professionals by insurance software company Xuber. For its Global Reinsurance Survey, the company spoke with senior professionals including insurers, reinsurers, brokers, industry organizations, lawyers, insurance-linked securities (ILS) investment managers, analytics firms and modelers, across the U.K., U.S., Bermuda, Canada, Channel Islands, Cayman Islands, Germany and Switzerland about the top concerns and biggest opportunities facing the reinsurance industry today. Of those polled, 81% listed soft market conditions among their top five concerns, followed by competition from third party capital (66%), and mergers and acquisitions (M&A) (66%).

The top five challenges cited were:

Xuber Global Reinsurance Survey challenges

Experts within the field do see plenty of growth opportunities as well. Indeed, some of this potential is thanks to the soft market. According to the report, “Another opportunity in the soft market identified by 59% of executives was to create niche opportunities that showcase their expertise. In a squeezed market, opportunities can open up for enterprising businesses that can identify today’s emerging risks and those of tomorrow and create products that are tailored for them. This can be linked to using Big Data better (51%) and diversifying the business portfolio (42%).”

The top five business opportunities cited were:

Xuber Global Reinsurance Survey opportunities

“This survey unearthed a range of new business opportunities that can provide the competitive edge needed to survive and prosper in the current environment,” said Chris Baker, executive director at Xuber. “With margins tight and prices falling, reinsurers are under great pressure to ensure their processes are as efficient as possible. Surviving and prospering in the soft market will require companies to operate at optimal efficiency, and their IT systems will be central to this. Only the savviest of reinsurers who recognize that technology can be the catalyst for change will emerge unscathed.”

Other key insights from the study include:

Xuber Global Reinsurance Survey