Belgium-based InBev NV acquires U.S. brewer Anheuser-Busch Cos. Inc. and Delta Air Lines and Northwest Airlines merge. When announced, mergers and acquisitions (M&A) always grab headlines. The news causes a variety of initial thoughts and reactions-excitement about the opportunities, concerns about job loss, questions about service changes, etc.
The insurance industry has seen its share of M&A activity over the past few years and experienced the same thoughts and reactions. Some succeed; some fail, and this could depend on how well the merging companies integrate their systems.
The history of M&A in any industry is not really great, says Jim Dean, principal with True Course Consulting, a Palm Beach, Fla.-based consulting and advisory firm focusing on the reinsurance, direct property/casualty and consumer-directed healthcare markets. "Generally, shareholders do not get the full return of that investment. Many times, on paper, the financials of combining the two companies look good, but the cost and the effort to integrate the companies from an operational standpoint-getting the same systems, duplicate overhead-becomes much more difficult than what they originally thought."
"Typically, in an acquisition, you get only 15% or 20% efficiencies by merging back office systems from two companies, but you may not realize that in an insurance merger because of the complexity, or you may realize it five years later than you actually planned," Dean says.
A study, "The Big Exit: Executive Churn in the Wake of M&As," from Virginia Commonwealth University, finds that poor post-merger performance and unrealized synergies cause more than half of all M&As to fail, and that up to one-half of all target firms are subsequently divested.
The study analyzed the turnover patterns at more than 1,000 firms, and examined the employment of more than 23,000 executives. It concluded that target companies lose 21% of their executives each year for at least 10 years following an acquisition, more than double the turnover experienced in non-merged firms.
A COMPLEX PROCESS
With all the mounting evidence of mergers failing to meet expectations, M&A activity could take on even more controversy.
"Going forward, CEOs and presidents are going to be much more highly scrutinized by the shareholders in terms of proposed acquisitions as to whether the merger will actually work-not look at just the assets on the balance sheets or the total sales numbers-but whether the two companies can become one organization in the future," Dean says.
Bob Alban, director-mergers & acquisitions at Stevens Point, Wis.-based Sentry Insurance, knows how much work it takes to make two companies one. "Consolidation of platforms and systems is the largest (most resources, cost, time) integration task when acquiring an insurance company and probably the second most important activity that you need to get right in order to create value through M&A," he says. "The most important activity would be communication to stakeholders-employees, policyholders, shareholders, vendors, etc."
Consolidation of platforms isn't unique to the insurance industry, but it may be more complex than other industries. "The insurance industry typically has more legacy systems than most other industries. So, oftentimes you'll find systems that are 15 or 20 years old," True Course's Dean says. "This means the systems have 15 or 20 years worth of corporate intellectual knowledge built into them and when you merge two different companies, in order to gain the efficiencies, you need to merge those two systems into one processing system."
IT DUE DILIGENCE
Dean, who previously served as a senior manager with BearingPoint, co-authored a report, "Insurance M&A: Examining the Operational Considerations." The report states financial due diligence may take 30 days, but figuring out how to merge two companies by traditional means can take months. Companies should employ a tailored due diligence framework to accelerate the defining of steps needed to align existing operations, processes and systems with the target company, according to the report.
Such a framework can calculate an "insurance integration index" to quantify integration by degree of difficulty. The index can be applied to specific business units, such as underwriting, claims, sales and distribution, according to the report. The tool can help assess technology, people and processes, and aid in setting priorities and allocating resources to pressing integration efforts.
"Typically, at the beginning of an acquisition there's a very small, focused deal team communicating all of the financials of a proposed acquisition," Dean says. "But, they need to spend just as much effort in figuring out how they're going to actually merge the two companies and operational philosophies-claims, payment and process philosophies. They need to ask themselves what the future of these two companies will look like (from a systems standpoint), how much will it cost to make them one and how long would it actually take to merge the two together."
Details such as these are why some executives will get input from IT. "IT is always integrated into the due diligence process," says Rainer Janssen, Munich Re's group information executive (head of IT). "Our business is around information-based service provisioning, so IT is key to our future success. As a consequence, no material M&A decisions are taken without solid reflection of IT impact."
In April 2008, Munich Re concluded the acquisition of U.S. specialty primary insurer Midland by acquiring a 100% stake in the company, including its wholly owned insurance subsidiary, American Modern Insurance Group, and Janssen says the integration was easy. "The key to our ‘ease of integration' is that we have a group-wide consolidation engine based on SAP software," he says. "All of our legal entities are merged into their reporting data into one logical and physical system in Munich. This makes M&A integration easy, because you just have to interface to one well-defined system."
Janssen also credits Munich Re's groupwide defined "global template," which is a common general ledger structure. This is the next integration step, producing communality of reporting schemes.
Sentry's Alban relies on communication even before the integration process begins. "You need to address the personal computing issues that will enable the combined organizations to function as one-e-mail and phone being the most important. Intranet also is important," he says. "On previous acquisitions, we had all the e-mail files ready to go so that within a few hours of close, everyone had their new e-mail address and could access the address book that included new and existing employees. I like to have the first 90 days of integration scripted in detail. Beyond that, you should have a high-level integration plan, and the integration team should be working to that plan. If they want to deviate from the plan, they should present the business case for that."
COMPLEX SYSTEMS
Insurance systems and processes, specifically, are complex-integrating them, even more so. "Generally, if it's a true acquisition that they want to roll their operations into-even if it's a different line of business-they may keep those application systems (policy admin, claims, underwriting) totally separate, but still integrate their HR, legal, etc.," Dean says. "And that's different if a bank bought another bank, where everyone's direct deposit could be combined on one account. But that may not be the case in insurance."
Also, insurance companies have different types of cultures-both in claims and underwriting-so the environments of the merging companies may be different. According to Dean, underwriting systems are one of the most difficult to integrate, "The policy admin system, in terms of new business, endorsements, cancellations and terminations, is the core of it, so it's probably a longer project," he says. "But underwriting, depending on the underwriting guidelines of the two companies, could be totally different. The companies have to decide on how they're going to underwrite as a corporation and may even go with a whole new underwriting approach and merge them into a third alternative. Many times, the underwriting rules could be embedded into the code. So it's hard to extract all of the rules from a coding standpoint."
For Munich Re's recent acquisitions, its global integrated system platform played a helpful role. "Even if we acquire reinsurance portfolios, which would need a much deeper process integration, we would be ready due to our global integrated system platform being in place," Janssen says. "As an example, when the board decided to react on the liberalization (opening) of the Brazilian market by establishing a fully fledged subsidiary in Brazil, we where able to provide the complete IT platform (underwriting platform, accounting/treaty/claims management system including external reporting support) within just 10 weeks."
Time is another concern with integration. And, of course, it varies with the type of integration and company. "In insurance it takes a long time, but if you have flexible, modern systems, you can do it much faster," Alban says, whose 2005 acquisition of Viking Insurance required a four- to five-year platform consolidation project-although this included a great deal of modernization to the existing platform that was already being planned. "Once all of our systems are modernized, I would want to challenge our people to get all integration activities completed in 12 to18 months. If you have a COBOL-based system on a mainframe, you are looking more like three to five years to complete. And these numbers are from the close of acquisition, not the announcement of acquisition."
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