Email
Newsletters
R&I ONE®
(weekly)
The best articles from around the web and R&I, handpicked by R&I editors.
WORKERSCOMP FORUM
(weekly)
Workers' Comp news and insights as well as columns and features from R&I.
RISK SCENARIOS
(monthly)
Update on new scenarios as well as upcoming Risk Scenarios Live! events.

Alex Wright

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.

M&As

Consolidation Remains Strong

P/C insurers and reinsurers are on track to surpass last year's $10 billion in M&A activity.
By: | August 12, 2014 • 4 min read
KPMGstory

The volume of insurance M&A deals is expected to be at least as high in the second half of 2014 as the first six months, according to industry experts.

A total of 35 property casualty and reinsurance deals worth approximately $5.6 billion were sealed in the first six months of 2014, according to AM Best. That’s more than half the $10 billion total recorded last year, with more deals expected, said one industry insider.

Advertisement




Edward Best, a partner at law firm Mayer Brown, who specializes in M&A said: “In the first half of the year, there were five deals in the U.S. over $500 million.

“For the second half, I wouldn’t be surprised if we have at least an equal number of large deals,” he said.

The surge in M&A activity is being fuelled by excess capital held by insurance companies looking to strengthen their position in core markets and boost their returns in a low interest rate environment.

New research by advisory firm KPMG revealed that more than half of 95 U.S. insurance bosses surveyed expect to be involved in an M&A deal in the next 12 months.

Laura Hay, national leader, KPMG insurance practice

Laura Hay, national leader, KPMG insurance practice

Laura Hay, national leader of KPMG’s insurance practice, who led the 2014 Industry Outlook Survey, said: “M&A activity is expected to ramp up in the next year as insurers leverage their strong capital positions to seek profitable growth, enter new markets and rationalize non-core operations.

“P&C insurers are acquiring companies with enhanced technology platforms to gain a competitive edge and view M&A as a crucial means to increase their distribution capacity.”

Insurance company leaders named access to new markets and geographic areas (45 percent) and regulatory changes and pressures (45 percent) as the two main drivers for M&A.

Moreover, 34 percent said strategic acquisitions were their top priority in terms of investment, closely followed by customer programs (25 percent) and information technology (24 percent).

Hay said there had been a significant shift from wholesale acquisitions of companies toward block-buying, focusing on specific distribution platforms or moving into new lines of business.

“There’s now a much greater focus on companies’ core business and building scale in areas that are strategically aligned with their business model,” she said.

And that is just the start, said Hay, following a period of uncertainty immediately after the financial crisis when insurers reined in capital to use as a buffer against market volatility.

Best said the M&A activity was being driven by the soft market and low interest rates, with insurers looking to put their capital to better use.

Edward Best, partner, Mayer Brown

Edward Best, partner, Mayer Brown

He said the latest push has been led by non-U.S. companies looking to extend their global footprint, citing the example of Brazil’s only publicly traded independent investment bank Grupo BPG Pactual’s recent purchase of Ariel Re and Validus’ $700 million deal for Western World earlier this year.

“A lot of large U.S. insurers are not making as many acquisitions domestically as before because of the soft market,” Best said.

“Most of the big insurers are already national and do not need to expand geographically in the U.S., so they are looking to expand their product lines, especially specialty lines which may have better pricing.”

And he doesn’t see the recent trend of M&A activity slowing down any time soon, provided there are no major catastrophe events.

He added that further consolidation of the market would serve to reduce the excess capital in the market and thus have a positive effect on rates, particularly in the reinsurance sector.

At an insurance agency level, Daniel Menzer, a partner at financial services firm Optis Partners, said the uptick in M&A deals was being driven by a proliferation of PE-backed buyers with investors looking for a steady return, as well as more attractive pricing as a result of increased competition.

“We see no reason now for the upward trend to change,” Menzer said. “With somewhere between 20,000 to 30,000 insurance agencies across the U.S., there are likely plenty of baby-boomer owners that want/need to sell, along with all the other strategic sellers that want to join something bigger to expand their growth opportunities.

Advertisement




“Barring major tax changes that could stall or accelerate transactions, a significant economic turn or some other kind of global event that could disrupt economies and other aspects of life, we expect the general strong M&A marketplace to continue.”

The impact of new regulations and legislation remains the biggest threat to insurers’ business models, according to 34 percent of the KPMG survey’s respondents.

Hay added: “Companies seem to be working on improving their core business but perhaps not taking some of the more revolutionary jumps or more dramatic changes that need to be made to their business models.

“How quickly they evolve their business models in this respect will play a big role in determining who the market leaders will be in three to five years’ time.”

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
Share this article:

Mergers & Acquisitions

Data Transfer

The value of data in a merger cannot be underestimated.
By: | May 1, 2014 • 6 min read
R5-14p30-31_02Data.indd

The transfer of data is key to any successful M&A, however many companies neglect to safeguard their data even at the most basic levels.

In many cases, firms simply overlook the value of data because they would rather focus on the hard assets involved in the deal such as property and equipment.

Advertisement




But the consequences of ignoring the value of data as part of the transaction can be catastrophic, resulting in the loss of highly sensitive company information, the price of the deal being significantly affected or the deal falling through altogether.

M&As are big business in today’s fast-paced corporate world, with the total volume of global deals amounting to $2.33 trillion in 2013, according to Bloomberg, meaning that data handling is now more important than ever.

R5-14p30-31_02Data.inddDavid Molitano, vice president, content, technology and services liability division, at OneBeacon, said data is often the No. 1 reason for a company to be acquired in the first place.

“It is difficult to place an average cost on data itself because it will have a different value from company to company,” Molitano said. “The true dollar value amount really depends on what a company is willing to pay for that data and the accompanying intellectual property.”

He said that any data transferred as part of a deal needs to be first clearly defined, evaluated and controlled just like any other asset.

However, despite all the checks in place, any company holding large amounts of data would naturally be a target for a data breach, he said.

“Since the data directly correlates to money on the black market, there is the constant threat of a data breach,” Molitano said. “In an M&A situation, a company must also look more closely to internal issues such as a disgruntled or recently discharged employee who may take confidential company information with them when they leave the company.

“Since so much of today’s data is easily portable, removing data from a network and a place of employment is unfortunately very easy.”

Richard Clark, UK-based Xuber’s head of specialist commercial, whose company services the Lloyd’s of London market, said that data is just as valuable as the systems and repositories where it is stored.

“In an M&A deal, the retention of existing customers and a base from which to grow the business are obvious imperatives,” he said.

“Therefore, the history or dealings (claims, customer information, premium payment records etc.) and the analyses that can be run from the existing data are vital.”

Clark said the risks involved in transferring data in any M&A include the loss of vital intellectual property and other unforeseen costs resulting from software access contracts not being properly checked.

The consequences of not getting the data part of the deal right could be loss of business as well as the absence of a statistical basis from which to operate when evaluating future opportunities.

 Underestimating Value

“There isn’t an executive in the land that doesn’t know the true value of data,” said John Merchant, Head of Cyber Liability & Professional Liability Underwriting at Freedom Specialty Insurance Co.

“However, many times in an M&A deal, the value of that data is vastly underestimated and it isn’t nearly as well protected as it should be.”

John Merchant, Head of Cyber Liability & Professional Liability Underwriting for Freedom Specialty Insurance Co.

John Merchant, Head of Cyber Liability & Professional Liability Underwriting for Freedom Specialty Insurance Co.

Merchant places a higher value on data than on the hard assets involved in an M&A.

“During a deal, most people at the board of directors’ level look at the more traditional aspects such as the financials and pro-formas,” Merchant said. “I think that, however, is more of a generational issue and due to a general lack of understanding about company systems and data oversight.”

Security is the single biggest issue for companies transferring data, he said.

However, particularly in non-technology deals, the risk manager responsible for looking after the data is often brought in too late in the process, meaning that the data is never truly secure, he said.

From a buying perspective, he said, the buyer needs to assume all of the liabilities associated with the data.

“They have to look at exactly what the data is and what they are buying, who it belongs to and whether it is being handled properly,” Merchant said.

On the other side, he said, the seller is also responsible for the transfer of that data.

Advertisement




One of the biggest unknown risks, according to Merchant, is the security of cloud computing and the use of third-party providers such as Google or Amazon to handle any data involved in a deal, because it is still a relatively new area.

“On the carrier side,” he said, “we haven’t necessarily seen a lot of claims activity or lawsuits in that area. However that is not to say it isn’t happening, so it’s something we need to keep a very close eye on.”

In the worst-case scenario, said Merchant, there could be a loss of data or the deal could fall through because of the way the data was handled.

“If companies don’t start to look at their data as a hard asset such as property, then they could be in real trouble if something goes wrong further down the line,” he said.

Ryan Gibney, an underwriter at XL who specializes in technology, cyber liability and data protection, said that his clients realize the value of data and have taken the appropriate steps to protect it at source.

“It is particularly important for companies in the public eye and public companies with shareholders that whenever they transfer data as part of any deal that a nondisclosure agreement is signed and that all of the network security controls of the other party are properly audited,” Gibney said.

“On top of that, they need to ensure they have cyber insurance to protect themselves and their clients in the event of any loss of data shared as part of the deal.”

One of the biggest issues to be resolved, said Gibney, is the control of access to data, where it is stored and who uses it once it has been transferred.

“Companies want to make sure that any data transferred is fully protected so that if an improper disclosure of that data occurs, you can advise any inquiring parties that the proper controls were in place to safeguard that data.”

Most of the errors occur, he said, because companies don’t have the right basic encryption protocols in place.

Tim Crowley, director, management and professional risk group at Crystal & Company, said it is important to get the company’s IT team involved as early as possible in the process in order to evaluate all of the other company’s privacy and security protocols, and to align the two companies.

“I think the critical thing for the risk managers, particularly on the buying side, is to continually look at their policies as they add different entities from potentially different industry classes, because not one policy is the same.”

—  Tim Crowley, director, management and professional risk group, at Crystal & Company

Crowley said the market for risk transfer policies has broadened considerably over the last few years in terms of the coverage provided for both first- and third-party liabilities.

“I think the critical thing for the risk managers, particularly on the buying side, is to continually look at their policies as they add different entities from potentially different industry classes, because not one policy is the same.”

Advertisement




Kevin Maloy, senior managing director, M&A, special practices, at the same brokerage, added: “From a risk management perspective, we are seeing more companies from a good governance standpoint, adopting the concept of a privacy committee and establishing privacy procedures.

“There are a number of clearly defined and set guidelines that companies can follow in order to take the right enterprise risk management steps to protect their balance sheets from an unintentional breach.”

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
Share this article:

Global Shipping

Full Speed Ahead

A dispute delaying Panama Canal construction was resolved, but further delays could be costly to shippers and exporters.
By: | March 25, 2014 • 3 min read
200247925-001

Any further delays to widen the Panama Canal could have far-reaching cost implications for all parties involved in the construction project and the shipping companies and exporters who use the Canal, a marine risk expert warned.

The Panama Canal Authority (ACP) signed a deal this month to end a four-month dispute — and a two-week work stoppage — over $1.6 billion in cost overruns claimed by the Grupo Unido por el Canal consortium (GUPC) carrying out the work. The dispute had threatened to derail the whole project, which now is expected to cost nearly $7 billion.

Advertisement




Under the terms of the agreement, the Authority and the Spanish-led construction consortium will each invest an extra $100 million in the project.

Zurich North America, which holds $400 million surety bond on the project, “worked diligently with the ACP and GUPC to reach an agreement on the matter and fortunately the two sides have had a successful negotiation,” said Michael Bond, head of surety, Zurich North America. “We congratulate both of them on effectively reaching a favorable outcome. Zurich was glad to have played a role in a solution that brought the project forward.”

When the Canal expansion is completed in December 2015, the new third lock will house 12 giant lock gates designed to allow larger cargo ships through, and double the shipping lane’s capacity.

But Douglas Sakamoto, class underwriter, marine, Liberty Specialty Markets, warned that any further interruptions could result in shipping delays, increased costs and lost shipping tolls.

“The forecast for work to be completed has changed from 2014 to 2015, which is still not a massive delay when compared to the dimension of the work and the expectation in terms of international trade turnaround,” Sakamoto said.

“However, a longer delay could impact several international trade industries since there are lots of related ongoing investments, such as work on several international ports to adapt them to the new vessels, and orders placed for the new-Panamax vessels.

“If the work can’t be completed for any reason and costs still continue increasing, there are a number of serious implications such as the termination of the agreement with the current consortium, and the bond policy may be required in order to provide the extra amount needed to complete the work.”

When done, the Panama Canal Authority is expected to double the $1 billion in revenue it currently receives from shipping tolls.

With more than 13,000 ships passing through the Canal every year, Sakamoto said, construction delays could mean restrictions in the amount of goods producers can export as well as increasing the time it takes to ship the goods.

He noted that producers of commodities, such as LNG, which are exported from the U.S. Gulf Coast to target markets like Asia and the west coast of Latin America could be affected.

In addition, grain producers in the Brazilian ports of Itaqui, Suape and Pecém would also lose out on shorter shipping times, he said.

Shipping companies that have invested heavily in new-Panamax vessels orders several years ago would similarly miss out on vital revenue, Sakamoto said.

Advertisement




International port authorities that have poured vast amounts of money into developing their ports for larger vessels and cargo volumes would also be adversely affected, Sakamoto said.

Pressure to meet the new deadline for completion of 2015, he said, could also impact labor force costs and suppliers.

“The Panama Canal construction project has been highly debated,” said a spokesman for Allianz Global Corporate Specialty, “but it’s actually not unusual for a large construction project to run over/get delayed. In fact, that’s why with project cargo coverage, there is a particular element called ‘delay in start up’ protection to help mitigate that risk.”

Work on the Canal project is now 70 percent complete; however the delay has come at a considerable cost to Sacyr, the Spanish building company that is leading the consortium, which saw its share price drop 6.9 percent this month following a breakdown in initial talks.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
Share this article: