Cultural integration biggest challenge facing global reinsurers with M&A’s: Xuber study

Xuber, part of London, United Kingdom-based Xchanging’s insurance software business, revealed the second wave of results from its global reinsurance survey on Wednesday, which found that cultural integration was the biggest challenge facing reinsurers in relation to mergers and acquisitions (M&A).

Chapter 2: Merger & Acquisition Success: A Market’s Challenge, was the second part of Xuber’s Global Reinsurance Survey 2015. Chapter 1: Opportunities and Challenges, released in early May, found “ongoing soft market conditions to be the most widely-cited challenge facing the global reinsurance industry in 2015.”

The survey polled more than 40 senior professionals, including insurers, reinsurers, brokers, industry organizations, lawyers, ILS (insurance-linked securities) investment managers, analytics firms and modellers, across Canada, the U.K., U.S., Bermuda, Channel Islands, Cayman Islands, Germany and Switzerland.

Chapter 2 confirmed that executing and implementing M&A was at the forefront of industry leaders’ minds, following a period of intense activity in this area, Xuber said in a press release. The major challenge reinsurers will face as a result of M&A is cultural integration, with 95% of respondents placing it among their top concerns. This was followed by the integration of multiple systems (83%), distraction from business as usual (81%), operational alignment (78%) and duplication of resources (63%). [click image below to enlarge]

The survey noted that one executive offered the following comment: “The biggest cause of failure in M&A is lack of leadership and cultural fit.” Another said: “Creating and understanding the identity of the merged company is vital to motivate staff and effect change and integration.” A third said that “companies should not lose sight of the qualities of each that brought them together, or risk becoming merely larger and not better – especially in a soft market environment.”

Related: Ongoing soft market conditions major challenge facing global reinsurers: survey

Chris Baker, executive director of Xuber, agreed that “bigger does not always mean better, and the mismanagement of the cultural integration between merged companies can ultimately undermine the potential value created. Fusing diverse company cultures and qualities can deliver immense value as both companies bring something unique and different to the table. Mergers and acquisitions create anxiety amongst employees, and both companies are keen not to lose a culture that works for them and is meaningful.”

The press release noted that the industry saw a “potentially market-transforming spate of M&A action at the end of 2014 and the beginning of 2015.” According to A.M. Best Company, in 2014, there were 50 international reinsurance companies which wrote more than US$500 million of gross reinsurance premiums, with Munich Re the largest (US$38.3 billion) and Wilton Re the smallest (US$506 million). [click image below to enlarge]

When asked to predict how many reinsurers will be writing US$500 million or more in gross written premiums in 2017, opinions were mixed with 40% of respondents thinking there would be between 40 and 50, followed by 20-30 (23%), 30-40 (20%), more than 50 (15%) and 10-20 (2%).

M&A will inevitably lead to fewer reinsurers, the release said, but an overwhelming 80% of those surveyed did not believe this would lead to less competition, while only 18% did believe the market would be less competitive.

Baker suggested in the release that, in a combined organization, the ability to handle, manipulate, analyze and act on data is key to success or failure. “M&A is an opportunity to forge ahead through innovation – something that can lead to greater business agility, better decisions, efficiencies and cost savings across the board,” he concluded.