Tag Archives: mergers and acquisitions

How to Address Environmental Risk

Mergers and acquisitions (M&A) insurance solutions are effective tools to facilitate the closing of mergers and acquisitions and finance transactions when parties require additional comfort on a variety of issues. Proven strategies to achieve certainty of closing, these solutions are used by buyers and sellers to bolster both the decision-making process and approach to risk allocation at times when traditional legal opinions/expert advice, indemnity, escrow or sales price reductions do not provide adequate financial comfort or could impair the economics of the deal. Representations and warranties insurance, specifically, has emerged as a common tool in the current M&A market – serving as a means for sellers to effectuate a clean exit and for buyers to ensure they have a viable source of recovery if the business ultimately is not what it was represented to be.

Typical R&W coverage generally extends to most, if not all, of the representations and warranties provided by the seller or target company in the purchase agreement, including fundamental representations such as title and authority as well as the full suite of business representations, including financial statements, tax, intellectual property and undisclosed liabilities. Of course, the scope of coverage varies deal to deal depending on the operations of the target company and industry risk profile, as well as the depth of the buyer’s due diligence process. Carve-outs to coverage are often limited and, when proposed by the insurer, are narrowly tailored to the specific known issue causing concern.

One area that can be challenging to insure is environmental risk. Insurers’ ability to cover an environmental representation within the R&W policy is case-specific and depends on not only the environmental footprint of the target but also what issues are uncovered during diligence. Deals involving target companies with a relatively light environmental footprint or a positive claims history are often successful in achieving coverage of environmental representations – those that fall outside this category may confront exclusions for specific environmental conditions or, in the most severe case, an exclusion of the environmental matters representation itself. Subject to underwriting, coverage for “paper” environmental risk such as licenses and permits can often be preserved. In any circumstance, however, R&W policies are not designed to provide coverage for known contamination, active remediation or toxic tort allegations.

For dealmakers grappling with limitations to coverage of environmental matters in the R&W policy, all is not lost — acquisitions of target companies without a clean bill of environmental health or involved in a risky class of business are not left without options. Stand-alone environmental insurance can be an effective complement to an R&W policy to help plug the gap in coverage around the environmental representations.

Depending on the nature of the transaction and the complexity of the target company’s site(s) and operations, a properly designed environmental site liability policy, which is also known as pollution legal liability, can complete the R&W placement. This can be accomplished by providing essential first- and third-party coverages including defense costs addressing known and unknown environmental conditions, with certain restrictions, with or without an environmental representation contained in the underlying purchase agreement. As a complement to the R&W policy, a customized environmental policy may also be able to replace or supplement an escrow or indemnity, becoming a value-accretive tool for future deals involving the insured site/operation by the careful addition of policy assignment provisions. R&W policies similarly afford assignment of rights to a future purchaser of the stock or substantially all of the assets of the target company, providing an attractive value-add for future divestment.

See also: The Environment for M&A in Insurance

Environmental site liability policies do not rely on establishing a breach of a representation and its subsequent damages. They are designed with a relatively low retention, as compared with an R&W policy, and are responsive to changing environmental regulations that can give rise to a loss. Written on a “claims made” basis for policy terms up to 10 years, environmental site liability policies can provide first-party clean-up and third-party protection for clean-up, bodily injury or property damage claims for known and unknown environmental conditions. This product has the broadest application of any single environmental product line due to its flexibility of wording and risk specific underwriting. From an operational standpoint, the environmental policy can be structured to either cover an entire corporation’s operations or a single site. Extensions of coverage for ancillary current or historic operations can also be covered including divested locations, waste disposal, transportation and business interruption. Coverage offered may be tailored to all historic operations pre-closing and extended to continuing operations for the target company post-closing.

Additionally, the environmental site liability policy provisions are flexible enough to be used in lieu of an indemnity or to support indemnity requirements of a purchase and sale agreement by responding to an indemnified party for payment under the terms of the purchase and sale agreement if the indemnitor fails, or is unable, to honor its indemnity. This coverage extension is known as an “excess of indemnity” and is carefully underwritten with counsel and a comprehensive review of the purchase agreement. The placement of comprehensive environmental insurance may also help avoid carve-backs to coverage under the R&W policy by providing insurers comfort that the R&W policy is not the first line of recourse on environmental issues. In those instances, the R&W policy specifically sits excess of the underlying environmental policy, responding only after such policy limits are exhausted (or loss incurred equivalent to the underlying limits if the environmental insurer is unable to satisfy the claim). Careful drafting of the “Other Insurance” provision in the R&W policy is needed to ensure the smooth function of such a structure.

Consider a buyer looking to acquire a nine-facility target engaged in wood treatment operations since the 1960s. Two facilities are currently the subject of an indemnity included in a 1980s purchase agreement with remediation continuing at those locations. The buyer has negotiated for the indemnity obligation to continue through the current transaction, but there are seven sites without any such indemnity. Although the R&W underwriter recognizes the environmental representation and associated indemnity with respect to two of the sites, the absence of protection on the remaining sites and long history of operations creates concern and thus the need for environmental issues to be insured separately. The environmental broker designs a tailored solution including two policies to provide a comprehensive risk management solution:

Policy 1: Properties that are the subject of the indemnity receive a policy dedicated to the scope of coverage under the indemnity; the coverage matches the indemnity obligations and applies on an excess basis; the policy is triggered by failure of the indemnitor to perform on their obligation, in excess of the policy self-insured retention (SIR).

Policy 2: Provides coverage for new conditions and unknown pre-existing pollution conditions at all nine locations; known conditions at sites without the indemnity are excluded for remediation costs

Both policies carry a 10-year policy term, with exception of the new conditions coverage policy that is limited to three years. Policy 1 responds if the indemnifying party is unable to perform.

The seller was able to limit the scope of the indemnity solely to known and quantified clean-up obligations. Any additional indemnity for unknown conditions or tort liability associated with known or unknown issues was not required because the insurance program provides that coverage. Both Policy 1 and 2 also contained assignment provisions that are beneficial in the event of a future sale.

In another instance, a transaction stalls when the R&W underwriter declines to insure the environmental representations of a large global equipment manufacturer because due diligence demonstrates that the target locations likely have significant environmental impacts due to long-time solvent use. The environmental insurance broker is called in to design a solution:

Policy 1: Provides coverage for all pre-existing conditions, known and unknown, where the most challenging locations assume a higher self- insured retention and the policy restricts coverage for remediation by applying a capital improvement and voluntary site investigation exclusion coupled with a third-party trigger for any remediation claims. A 10-year term applies, and the other insurance provisions are modified to primary coverage; most importantly, the policy does not specifically exclude any constituents.

Policy 2: Is written on a three-year term and provides coverage for new conditions from date of sale forward for the continuing operations. Coverage is restricted in a similar matter to Policy 1.

The environmental program structure described above was quite beneficial to the seller because it did not contain any constituent exclusion. This solution also allowed the R&W underwriter to provide coverage for the seller’s environmental representations on an excess basis.

As these examples suggest, the current environmental marketplace is competitive, resulting in favorable coverage terms, conditions and premium for many transactional risks. Limits of up to $50 million are potentially available from a single carrier, and total limits of $500 million are potentially available for layered programs involving multiple carriers. Significant capacity is similarly potentially available for R&W insurance with limits available of up to $50 million-plus from any one carrier and close to $1 billion on an aggregate basis per deal. The significant increase in demand and use of R&W policies over the past few years has also translated into a very competitive marketplace, resulting in decreased pricing and broadening coverage and appetite for challenging deals.

See also: Developing A Safe Work Environment Through Safety Committees  

The strategic use of R&W insurance coupled with an environmental policy can be indispensable in helping buyers and sellers move a transaction forward to a smooth and successful close. Dealmakers and their advisers should carefully consider the environmental risks posed by the operations of the target company early in the deal to determine how such risks will be apportioned between the parties and if insurance, whether a R&W policy, environmental policy or both, provides an opportunity to secure protection against such risks while maximizing the economics of the transaction.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

Life/Annuity M&A Is Heating Up

As life insurance and annuity carriers pursue greater market share and growth, a potential solution sits before them: M&A activity. This transactional path, leading to deep consolidation in the life insurance and annuity (L&A) sector in the U.S., is stoking much debate and discussion in company boardrooms.

The hunt for elusive growth and profitability for carriers in the U.S. has many players, creating a crowded marketplace for possible consolidation. The multi-headed acquirers come in three dominant forms: large insurance companies, private equity (PE) investors and foreign acquirers, driven largely by the Chinese and Japanese.

Insurance carriers intimately know about their competition and what companies in the sector would mesh well within their operations. Executives have the greatest amount of specific industry expertise and therefore can understand the pros and cons in a specific combination.

See also: How Life Insurance Agents Can Be Ready

Private equity investors have been turning to the life insurance and annuity field for several years to provide consistent returns, as these companies have predictable cash flows. Through these investments, investors can strengthen their returns for assets under management with steady growth. One caveat to this investment approach is the concern of the increasing regulatory state and federal pressures, as navigating through 50 individual state regulatory guidelines can be burdensome and difficult if a company moves out of a state and into a new one.

Foreign countries like China and Japan continue exploring opportunities to increase their presence in the U.S., the world’s largest insurance market. Reasons abound: Japanese insurance companies have found U.S. acquisition targets appealing to offset the aging of Japan’s population and to provide a more attractive interest rate environment. Chinese companies have been snapping up foreign companies, including in the U.S., searching for yield on their capital and economic growth.

Several reasons exist for this trend of M&A activity.

  1. Buyers are motivated by the current low-interest-rate environment and the opportunity to expand their assets and book of business. This has always been an essential piece of the M&A discussion as market conditions must be favorable to make any transaction worth its while.
  2. Sellers are suffering from the low return on their capital. By exiting less profitable lines of business, they can reallocate their capital for use in other capacities. As contemplation of one’s business clarifies, many carriers may conclude that selling, rather than buying, assets is the chosen path. Selling could stabilize or enhance a company’s bottom line as the capital obtained in a sale can be reinvested in its existing operations or be put to use for another potential acquisition.
  3. Increasing regulations are restricting the ability of companies to productively run their businesses; thus, they are looking for exits. Companies are often stymied by the sheer weight of complying with and managing regulations. Exiting businesses can become appealing.

Regardless of which direction is undertaken, one aspect paramount to success is the importance of ensuring that business continues to operate smoothly. In today’s environment, the role of technology, specifically at a time when companies are implementing and managing digital transformations, can be a beacon of light. And as acquirers delve deeper into possible transactions, increasingly they are employing an outsourcing model to extract more value.

See also: This Is Not Your Father’s Life Insurance  

Safeguarding a company’s operations and maintaining its continuity through powerful technology and servicing solutions, or what we call “future proofing,” has additional benefits besides the desired functionality. Companies must first build their vision and plans and then bolster them with end-to-end operational services. This step will then enable rapid expansion into new market segments, faster product launches and seamless servicing of open and closed blocks of business. By future-proofing through technology, carriers can drive greater efficiencies, lower costs and produce higher levels of customer satisfaction.

M&A: the Outlook for Insurers

Mergers and acquisitions in the insurance sector continued to be very active in 2016 on the heels of record activity in 2015. There were 482 announced transactions in the sector for a total disclosed deal value of $25.5 billion. Deal activity was driven by Asian buyers eager to diversify and enter the U.S. market, by divestitures and by insurance companies looking to expand into technology, asset management and ancillary businesses.

We expect the strong M&A interest to continue, driven primarily by inbound investment.

With the election of a new president and the transition of power in January 2017 comes tax and regulatory uncertainty, which may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize the repeal and replacement of Obamacare, tax reform and changes to U.S. trade policy, all of which have unique and potentially significant impact on the insurance sector. Further, the latest Chinese inbound deals have drawn regulatory scrutiny, with skepticism from the stock market regarding their ability to obtain regulatory approval.

Bond yields have spiked over the last few months and are widely expected to continue to increase. The increase in yields should improve insurance company earnings, which is likely to encourage sales of legacy and closed blocks.

Highlights of 2016 deal activity

Insurance activity remains high

Insurance deal activity has steadily increased since the financial crisis, reaching records in 2015 both in terms of deal volume and announced deal value. While M&A declined in 2016, activity remained high, with announced deals and deal values exceeding the levels seen in 2014. In 2015, deal value was driven by the Ace-Chubb merger, valued at $29.4 billion, which accounted for 41% of deal value.

See also: A Closer Look at the Future of Insurance  

Significant transactions

Key themes in 2016 include:

  • Continued consolidation of Bermuda insurers, with the acquisitions of Allied World, Endurance and Ironshore. Drivers of consolidation include the difficult growth and premium environment.
  • Interest by Asian insurers in continuing to expand their U.S. footprint — accounting for two of the top-10 transactions.
  • Expansion in specialty lines of business as core businesses have become more competitive. This is evidenced by (i) Arch’s acquisition of mortgage insurer United Guaranty as a third major business after P&C reinsurance and P&C insurance; (ii) Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade to build out its consumer-focused strategy; and (iii) the agreement by National Indemnity (subsidiary of Berkshire Hathaway) to acquire the largest New York medical professional liability provider, Medical Liability Mutual Insurance, a deal expected to close in 2017.
  • More activity in insurance brokerage, which accounts for two of the top-10 deals.
  • Focus on scaling up to generate synergies, as evidenced by the acquisitions done by Assured Guaranty and National General Holdings.
  • Continued growth in asset management capabilities, as exemplified by New York Life Investment Management’s expanding its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017 and MassMutual’s acquiring ACRE Capital Holdings, a specialty finance company engaged in mortgage banking.

Key trends and insights

Sub-sectors highlights

Life & Annuity – The sector has been affected by factors such as Asian buyers diversifying their revenue base, regulations such as the fiduciary rule by the Department of Labor and the SIFI designation, divestitures and disposing of underperforming legacy blocks, specifically variable annuity and long term care businesses.

P&C – The sector has been experiencing a challenging pricing cycle, which has driven insurers to 1) focus on specialty lines and specialized niche areas for growth and 2) consolidate. We have seen large insurance carriers enter the specialty space. Furthermore, with an abundance of capacity and capital, the dynamics of the reinsurance market have changed. Reinsurers are trying to adjust to the new reality by turning to M&A and innovation in products and markets.

Insurance Brokers – The insurance brokerage space has seen a wave of consolidation given the current low-interest-rate environment, which translates into cheap debt. The next consolidation wave is likely in managing general agents, as they are built on flexible and innovative foundations that set them apart from traditional underwriting businesses.

See also: Key Findings on the Insurance Industry  

Insurtech has grown exponentially since 2011. According to PwC’s 2016 Global FinTech Survey, 21% of insurance business is at risk of being lost to standalone fintech companies within five years. As such, insurers have set up their own venture capital arms, typically investing at the seed stage, in efforts to keep up with the pace of technology and innovation and find ways to enhance their core business. Investments by insurers and their corporate venture arms are on pace to rise nearly 20x from 2013 to 2016 at the current run rate.

Conclusion and outlook

The insurance industry will be affected by the proposed policies of the Trump administration, especially on tax and regulatory issues. Increasing bond yields and the Fed’s latest signal about a quick pace of rate increases in 2017 are expected to improve portfolio income for insurers.

  • Macroeconomic environment: U.S. equity markets have been rallying since the election, with optimism supported by President Trump’s policies to boost growth and relieve regulatory pressures. However, the rally may be short-lived if policies fail to meet investor expectations. While the Fed is widely expected to raise rates in 2017, other central banks around the world are easing, and uncertainty in Europe has spread, with the possibility that countries will leave the euro zone or the currency union will break apart.
  • Regulatory environment: The direction of regulatory and tax policy is likely to change materially, as the president has campaigned for deregulation and reducing taxes. Uncertainty around the DOL fiduciary rule has been mounting even though President Trump has not spoken out on the rule; some of his advisers have said they intend to roll it back. His proposed changes to Obamacare will affect life insurers, but at this juncture it is hard to estimate the extent of the impact given the lack of specifics shared by the new administration.
  • Sale of legacy blocks: Continued focus on exiting legacy risks such as A&E, long-term care and VA by way of sale or reinsurance. In 2017, already, there have been two significant announced transactions, AIG paying $10 billion to Berkshire for long-tail liability exposure and Hartford paying National Indemnity $650 million for adverse development cover for A&E losses.
  • Expansion of products: Insurers will focus on expanding into niche areas such as cyber insurance (expected to be the fastest-growing insurance product fueled by a slate of recent corporate and government hacking). Further, life insurers are focusing on direct-issue term products.
  • Technology: Emerging technologies including automation, robo-advisers, data analysis and blockchain are expected to transform the insurance industry. Incumbents have been responding by direct investment in startups or forming joint ventures to stay competitive and will continue to do so.
  • Foreign entrants: Chinese and Japanese insurers have keen interest in expanding due to weak domestic economies, intent to diversify products and risk and hope to expand capabilities.
  • Private equity/hedge funds/family offices: Non-traditional firms have a strong interest in expanding beyond the brokers and annuities business to include other sectors within insurance, such as MGAs.

Getting Beyond Risk in Insurance M&A

It’s no surprise that insurance companies excel at understanding the panoply of risks faced by their customers. 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 insurance companies only excel at half the job: assessing the risk of a potential takeover and expertly 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 that many deals in cross-border M&A in the insurance sector founder because of cultural issues. Too often, the industry views cultural differences as operational matters that can be hammered out, rather than behavioral differences that require a more considered approach. Boards of directors, which scrutinize 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 understanding 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, Heidrick & Struggles talked with senior insurance executives experienced in acquisitions in Asia, Europe and North America. Most agree that clearer communications and an active approach to identifying and addressing cultural issues can improve the value captured from M&A. Yet many admit they overlook it — one executive said that at his organization several transactions were led by people who never visited the target company or its market, and had little local knowledge. “Having bought assets, we expected local market leaders who were new to the group to adopt our culture off the back of a series of written protocols and the occasional visit to London,” he said. “We seldom asked them about the nuances of their marketplace.”

Increase M&A Activity

Ensuring that culture is top-of-mind will become increasingly 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 2014.1 Although the volume remains well below the pre-crisis peak — 674 deals in 2007 — the insurer concluded that indications “suggest that momentum behind M&A is building.”

In a separate study, Deloitte found the number of deals involving brokers grew 40% from 2013 to 2014.2 Although in Deloitte’s counting, deals involving underwriters edged lower from 2013 to 2014, the average value per deal almost tripled, from $124 million in 2013 to $359 million in 2014. Indeed, 2014 saw the announcement of eight insurance M&A deals with values of more than $1 billion, dwarfing the volume of big-money deals in previous years. The largest transaction was the $8.8 billion takeover of Friends Life by British insurer Aviva, creating the largest insurer in the U.K.

Sidebar: Let’s Make a Deal

Several factors are contributing to increased M&A activity in the global insurance sector, but most consider the main impetus to be overall lower policy rates. Lower rates are seen as a byproduct of overcapacity, and the industry is consolidating to retain profitability and increase differentiation. Other factors include growing interest in insurance M&A from a broad range of backers, including hedge funds, private equity and international investors. Companies are looking for ways to use vast cash reserves. A strong U.S. dollar has made some cross-border deals less expensive for U.S. companies. And insurers are recognizing 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 strategic acquisitions to drive their expansion plans. For example, in 2013, Sompo Japan Insurance bought U.K.-based Canopius Group, and in 2015 Mitsui Sumitomo Insurance (MSIG) bought Amlin, also of the U.K. And among the recent deals originating from China, Peak Re, a unit of Fosun Investment, bought Bermuda-based Ironshore in 2015, and in 2016, Mingshen was finalizing its acquisition of U.K.-based Sirius from White Mountains.

Against this background, insurance companies are pushed toward M&A for a variety of reasons. The most common, still, is to bring together two companies with complementary businesses and strategies and capture greater value through scale efficiencies. In Asia ,in particular, such mergers are trending as a way to support regional growth aspirations. For example, in 2014 Swiss Re paid $122 million for RSA’s China unit, Sun Alliance. RSA’s strategy to divest out of Asia thereby provided Swiss Re with an established platform for its continued growth of direct insurance in China. This deal, and others like it, focused on serving an aging Asian population with products centered on retirement planning and financial safeguards.

Other strategic goals are also driving deals — for example, attempts to harness digital technology and reinvigorate tired corporate business models. In one case, U.S. insurer Aetna in 2014 bought technology provider bswift, which offers cloud-based insurance exchanges and other digital products, for $400 million. These types of deals focus on integrating the newest technologies, such as mobile applications and big data analytics, as a core component of a company’s business model, either to reach customers, 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 acquired company.

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

See also: Insurance M&A: Just Beginning

The Power of Culture

While 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 cultural integration that produces better collaboration and new ideas.

Such cultural integration can take several forms. The parent company can absorb and dominate the culture of the acquired company (perhaps the most common form); the two cultures can coexist, with the acquired company retaining a certain level of autonomy; or the two cultures can mix, creating a more ideal corporate culture. Regardless of the form that cultural integration takes, the evidence suggests 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 organizational differences” as a post-integration challenge.3

Yet when companies get culture right, the benefits are significant. The 2004 merger of U.S. insurers Anthem and WellPoint Health Networks is a clear example. Soon after the $16.5 billion merger was approved, Larry Glasscock, CEO of the new company (now called Anthem), made it clear the merger signaled the birth of a new company and a new culture, rooted in internal trust and innovation. Glasscock first delivered the message to a newly formed executive-leadership team, composed of 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 orientation to performance management. By 2007, the company was named by Forbes magazine as one of the most admired companies in the U.S., had cut administration expenses in terms of share of overall revenue and was on track to reach its growth targets. In 2016, Anthem itself is in the process of merging with Cigna and could profit from remembering these lessons.

The “best” integration model depends on a variety of factors, such as the relative size of the two companies, the optimal organizational structure after the merger and the value created by various cultural characteristics. But identifying the right model is a crucial element of any M&A process. By planning strategies for assimilation with the same fervor as those for operational efficiencies, insurance companies can lower the risk of failure in M&A.

Before the Deal Is Done

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

Gather data on culture.

One useful tool for comparison is the corporate-culture profile, a diagnostic instrument based on survey data from both companies. Such surveys explore a range of corporate characteristics, such as attitudes toward personal accountability and collaboration, trust levels and integrity. They also gauge strategic alignment and commitment and assess the strengths and weaknesses of each culture. A corporate-culture profile can quickly identify areas in which two cultures diverge, pinpoint areas that may require immediate attention and highlight areas of common ground that should be recognized and celebrated.

Often, acquiring insurance executives wrongly (and perhaps unconsciously) assume that two companies in the same business will have relatively compatible cultures. In cross-cultural M&A, such notions are wishful thinking at best and can lead to challenges. Staff with different training, work environments and market experiences will naturally view work differently.4

Investigate the intangibles.

Our conversations with insurance executives who are experienced in M&A highlighted specific themes that arise during negotiations. The following concerns should be included in the process to lower the risk of cultural clash in an acquisition.

Geographic location

One executive who was involved in XL Capital’s 2001 $405 million takeover of Winterthur International, a unit of the Swiss insurer, said that cultural clashes delayed integrating the acquisition by years. “U.S. and Swiss cultures couldn’t be more different, and the conversations never even touched on the subject, only the data,” he recalled. “U.S. firms measure success on a quarterly basis, and Europeans have a long-term view on the business.”

Foreign executives with marginal connections to local culture or sensitivities commonly lead the due-diligence process. As a result, it is generally superficial and ineffective in regard to these intangibles. Deals are rarely scuttled over cultural concerns, even though these tensions can delay extracting full value from a merger and potentially affect expected returns.

Management level

One deal that was, in fact, scuttled was an aborted attempt by a global insurer interested in acquiring a niche firm in India. The acquirer found a sharp contrast between attitudes held by executives and staff at the target company. Senior executives were focused on growth, and mid-level managers worked in fear of disappointing them. Even though the financials were promising, the deal fell through over integration concerns. “You almost always only get exposure to top management during the due-diligence phase, and it’s a dress-up show,” an executive close to the deal said.

Potential problems can be avoided — or at least identified — by asking questions that go beyond a company’s books and by meeting all levels of staff. For example, ask senior managers about long-term strategies, business operations, styles of working and relations with mid- and low-level managers. Along with their answers, their approach — for instance: consultative or aggressive — should also be noted.

See also: Is M&A in Data and Analytics Setting a Path for Innovation?


Acquiring companies should also spend time with staff at all levels, assessing work habits and attitudes. Along with meetings at the workplace, off-site events can also be beneficial. “Buyers with a high EQ [emotional quotient] tend to have the ability to truly get the heartbeat of a business,” said the former regional leader for a global insurer, himself an M&A veteran. “Spend time getting to know the top and middle team outside of the work environment to understand their values and drive.”

Encourage clear, honest communication

In general, workers at an acquired company understand — and sometimes fear — that job cuts are possible. Painting too rosy a picture ahead of a deal could create tensions later when reality hits. “Be honest from the outset,” a senior manager at a European insurer suggested. “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 limits. When a global company negotiated a takeover of a Malaysian life insurer, the acquirer presented a clear plan for adjusting leadership roles, pointing out gaps and explaining how they would be filled, said an executive close to the deal. The plan was presented at meetings 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 picture of how integration will be handled if the takeover is completed. For example, acquiring companies often promise a short period with no major changes immediately following an acquisition. This interval allows senior executives and staff at both companies to become better acquainted and can help produce a more appropriate integration plan for capturing the full value of the merger.

In the case of the Malaysian insurer, for example, the acquirer agreed that there would be no major changes during the first six months. Once the grace period was over, changes were to be gradual and subtle, rather than abrupt and disruptive, said a top executive who worked on the integration. The executive noted that continuity between the due-diligence and integration teams was also important to ensure that the basis for such agreements was understood and that the agreements held. The approach was likely helped by lessons learned during an earlier acquisition in which the global parent and acquired company struggled for several years under two separate management teams.

Collaborate, don’t dominate

Creating a collaborative atmosphere — one that doesn’t alienate staff at the company being acquired — begins with first impressions. Companies that tout their superiority or power can find cultural integration more difficult. In one case, the due-diligence team from a U.S. acquirer flew into Asia on private jets, stayed at the best hotels and boasted of their lifestyle to staff at the target company, creating emotional distance between them.

“Historically, the insurance buyers have an absorb-and-impose approach to culture,” a top executive at a Japanese insurer said. “U.S. 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 protecting their core headquarters’ market first and other regions are at the bottom of the list.”

Throughout the acquisition process, staff at the targeted company should be treated as any other corporate colleague. Corporate hierarchies and chains of command exist, of course, but when they are the defining aspect of personal relationships, staff at acquired companies can become more anxious and less collaborative, posing an obstacle to integration. One executive observed, “Nothing raises hackles more than feeling you have been absorbed into a large and seemingly uncaring behemoth when, up until a few weeks earlier, you were top of the tree in your local market.”

See also: Cyber Threats and the Impact to M&A

After the Papers are Signed

If efforts before the deal can be seen as cultural intelligence-gathering, those after the deal focus 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 backgrounds together effectively requires 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 being tested by today’s volatile and highly competitive market.

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

Don’t rush big changes…

In many takeovers, cutting costs (and jobs) at the acquired company is one of the first priorities. But moving too fast can cause unnecessary friction and inadvertently force valuable talent out the door. By taking a long-term view of the value potential of an acquisition, companies can take the time needed to understand cultural differences, and then focus only on those that may directly prevent the company from reaching its goals. As two businesses merge, it’s natural for workers to become protective of their positions — and even paranoid about their future. The acquiring company must take pains to demonstrate that any cuts to duplicated roles will be decided based on merit, rather than internal connections.

Some insurers can be very deliberate with any changes they make to an acquired company. “Japanese companies, when acquiring outside their home market and when they do it right, take a long-term view,” said an executive at a Japanese insurer. “They don’t impose their culture (because) it’s so different. Instead, they spend a lot of time learning what works and what doesn’t before implementing changes.”

Some companies spend the first three or four months after an acquisition getting to know how the new company works. They might stage a night out with junior management away from their superiors to get a better idea of how they see the business. Such measures could help pinpoint where a company’s legacy culture might interfere with business 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 the integration is fully under way, continuing informal staff meetings at all levels can help define new cultural norms (such as greater entrepreneurship and accountability or the value of clients), reinforce key messages and gauge progress.

In one example, an insurance executive recalled that when a North American holding company recently moved to acquire an Asian arm of another global insurer, it tried a new integration approach. Instead of forcing job cuts, the acquirer left the organizational chart for the acquisition open and slowly introduced the company to the new leadership approach and cultural norms. Managers who weren’t comfortable with the new thinking left relatively quickly of their own accord. The executive said there were no conflicts around the departures, and in the end the company lost about 20 from a staff of 400. With the money saved by avoiding remunerations to retain the highest-performing managers, it offered each employee a 40% interim bonus after six months, which helped boost morale.

…but when the time comes, act

Once a decision is made to cut staff or to take another significant step, the acquiring company should act quickly and completely. Drawing out painful measures only accentuates lingering staff anxieties and delays the return to normalcy.

For example, when a British insurer recently took over a national business in Asia, it agreed to retain all staff for two years, partly to appease local unions. As a result, the local workers who were upset with the merger (about 10% of the staff) didn’t cooperate with the new leadership, and their attitude lowered morale and productivity across the organization. After about a year, the acquirer paid out the intransigent workers to leave early.

Create a strong team

Just as an acquiring company should be aware of its first impressions during due diligence, its leaders should work to build a team of peers with the acquired company’s staff during integration. Too often, buyers approach acquisitions like a conquering army, imposing its rules without much consideration of the implications. Many of the executives we spoke with noted that U.S. insurers are especially notorious for this approach.

When a global insurer bought the Asian unit of a European company, a number of unnecessary dictates upset the Asia staff, partly because they were perceived as ignoring cultural differences, an executive involved with the integration recalled. For example, the parent company banned sending text messages on company phones, even though text messaging was the primary channel the Asian staff used to reach its 5,000 independent agents. The Asian workers had to buy and use personal phones to do their jobs, the executive continued, adding that the acquirer also reneged on a promise to upgrade local offices after deciding it was too costly.

Along with exerting dominance over an acquisition, singling out staff for special treatment can also lead to discord. A common error is offering retention pay to only a few executives, rather than across the board.

Be candid about the downside

The importance of clear and honest communication continues 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 destabilizing rumors from taking hold. Any messages about upcoming 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 uncertainty is often more corrosive than the reality.

When QBE bought Zurich Insurance’s Singapore unit in 2004, the Australian insurer was clear on the implications, an executive close to the merger said. Among these were that costs would be reduced at the top, and anyone in a position with more than one claimant would have to reapply for the position, undergo interviews, demonstrate their capabilities and show that they fit the new culture — all within three months. Everyone adhered to the schedule, and there were no surprises or unnecessary conflict, the executive said.


The global insurance sector appears ripe for a new wave of consolidation as companies investigate entry into new markets and access to new technologies. As they pore over the numbers and explore the strategic rationale 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 cultural aspects — if they consider culture at all. Cultural differences, however, can often ruin an otherwise well-planned acquisition. By purposely including culture in the negotiation process and after the deal is signed, companies can improve their odds of success.

Related thinking

Larry Senn, chairman of Senn Delaney, discusses avoiding culture clash in mergers and acquisitions in this video.


1See  M&A in insurance: Start of a new wave?, Swiss Re Sigma, Number 3, 2015, swissre.com.

2See 2015 Insurance M&A Outlook: Continuing acceleration, Deloitte, 2015.

3For more, see “Defying gravity: Insurance M&A on the rise,” Towers Watson, January 2016, towerswatson.com.

4In acquiring assets outside the sector, such as technology companies, the danger is even more acute. The fast-moving culture of digital innovation often clashes with the more reserved pace of big insurance. To overcome this tension, some companies, including MetLife and Aviva, have set up innovation centers that operate separately from their parent companies.