September 2014 Bermuda:Re/insurance+ILS 25


truly getting a handle on reserve adequacy at the target group”. But predominantly it is about people and business cultures.


“Will the two firms gel, can you keep the people in place at the combined entity and how do the two risk tolerances measure up?” asked Gharib. Creating continuity and securing the buy-in of key staff are central to the successful execution of any M&A deal, he said.


As Mike Morrison, head of KPMG Advisory, Bermuda explained: “M&A is essentially about people—teams that want to see eye-to-eye and move things forward.” Without management buy-in there can be all sorts of repercussions, he said. M&A is often seen by those outside the transaction as an opportunity to pick up new staff who are forced or feel the need to jump ship, said Morrison.


“If teams leave it can severely impair the franchise,” said Charlie


Thresh, a managing director at KPMG Advisory, Bermuda. However, he warned that the merger of two entities can create just the sort of competitive dynamics that would make such an outcome more likely.


Although M&A among smaller entities might make sense as they look to establish themselves on the reinsurance panels of choice cedants, the motivations for M&A for medium and large-sized re/ insurers is less clear.


Shipperlee said that bolt-on acquisitions can make sense if the target is “attractively priced” or can fill a gap in the acquirer’s portfolio, but he warned that a large acquirer can “undermine the specific qualities that led to the target being attractive in the first place”. This can range from dynamism and an ability to react to change, through to a highly focused leadership and the fact that as a niche player they were highly valued by cedants or brokers.


Acquirers need to be careful not to erode those qualities that drew them to the acquisition and consider their long-term, mutual development.


Pulling the trigger


Having opted to pursue M&A, the next major hurdle is execution, and it is evident that transactions require a strong hand. “Those pursuing a transaction need to consider a host of factors,” said Rhoads. “Is the deal accretive to shareholder value; will customers benefit; can you retain the best people in the merged entity or do you end up losing your best and retaining your worst?


“Do you achieve cost efficiencies; and do the brokers view the move as a good or bad thing?”


Rhoads warned that with so many factors playing a part in the decision, transactions “require detailed analysis and a lot of nerve”.


Gharib said that a lot will depend upon appropriate due diligence,


with the acquired entities’ liabilities a key concern. Shipperlee spoke in a similar vein, arguing that “the challenge for the acquirer is


“Deals are often predicated on post-acquisition synergies, but people might see new underwriters as a competitive threat. As a result such synergies might be difficult to find,” said Thresh. Morrison added that one of the major reasons that M&A deals fail is that “people within the company cannot see it being beneficial to them, never mind that shareholders’ interests should ultimately be the motive behind such deals”.


Without making the case to key members of the team, transactions


may threaten the integrity of the combined entity and even existing entities that do not pull the trigger on a transaction.


Shipperlee added that deals also need to be “sold to shareholders” with a medium-term risk that “the acquiring leadership subsequently feel the need to grow the combined group into a soft market to try and prove the transaction was a success and hence be less willing to turn down poorly priced business”. While a turn in the market might provide all the justification a board needs, a protracted soft cycle could result in the acquirer having to justify again the value of the transaction it pursued.


“These issues combined with any reduction in the combined risk-


adjusted capital adequacy position (dependent on how the deal is financed) will be concerns for the ratings agencies. Conversely substantially enhanced diversification can support risk-adjusted capital and the agencies’ views of the combined group’s business profile,” said Shipperlee. It is apparent that acquirers need to tread carefully as they approach such significant, strategic decisions.


Despite the evident challenges of pursuing M&A, Rhoads said that “the environment for M&A is pretty ripe right now”. Gharib concurred, adding that S&P “expects consolidation to rise in importance on the strategic agendas of Bermuda boards—particularly those of smaller players” over the next 12 to 24 months. Although one transaction—Aspen-Endurance—has recently fallen through, there is every expectation that others will be attempted. 


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