Whether buying a smaller company at bargain prices or participating in a massive "merger of equals" deal, insurers must carefully evaluate IT compatibilities and costs.
This Month's Experts
- Kimberly Harris
Research Director, Gartner Research, Stamford, Conn.
- John L. Johnsen
Managing Director, TCi Consulting & Research, Cresskill, N.J.
- Matthew Josefowicz
Manager, Insurance Group, Celent, Boston
- Cynthia Saccocia
Senior Analyst, Insurance Practice, TowerGroup, Needham, Mass.
Q: What are some of the drivers behind the current surge in M&A activity? Will this trend continue?
A: John L. Johnsen, managing director, TCi Consulting & Research: The number of insurers that have demutualized recently is one factor. Wall Street demands better numbers, and there are two ways to accomplish that: by reducing costs and by increasing revenues. The need to increase revenues can be accomplished through organic growth or by acquisition. The slowness of organic growth is a main reason why we are seeing so much M&A activity. Another factor is the need to expand distribution channels and increase the number of people who can sell the carrier's products. An insurer with a strong base of successful agents and distributors for its products is a prime candidate for acquisition.
A: Matthew Josefowicz, manager, Insurance Group, Celent: We definitely expect to see this trend continue. Many companies over-expanded their operations during the boom years, and are now facing serious pressure on their reserves. They need to raise cash and shed non-strategic business units to survive in the current, tighter environment. Most of the buying is likely to be opportunity driven, as these over-extended companies put assets up for sale at bargain prices. We may also see more "mergers of equals" like St. Paul/Travelers, as companies see the potential strategic value of increased scale.
A: Cynthia Saccocia, senior analyst, Insurance Practice, TowerGroup: TowerGroup expects insurers to take the necessary steps to concentrate on core businesses and grow their market share in areas of strategic focus. The outlook for the life and annuity (L&A) and property and casualty businesses demonstrates significant differences in recovery, adaptation, and growth. For some, the result may be consolidation; for others, it may be business divestiture. Early examples of this in the life and annuity marketplace include the announcement by Manulife Financial and John Hancock of their consolidation, AXA's bid for MONY Group's life and annuity business, and SAFECO's announcement that it will sell its life and investments business to concentrate on property and casualty. The merger of St. Paul Companies and Travelers Property Casualty is an early indicator of how the P&C marketplace will be altered in the coming years by a select group of mega-insurers.
A: Kimberly Harris, research director, Gartner Research: There are different drivers behind different types of mergers and acquisitions. Conver- gence is what drove deals where insurers pursued merging/ acquiring other types of financial services organizations in an attempt to grow their product range and their customer base. We also saw M&A between insurers and distribution channels, such as agencies, to further move insurers towards their customers. This trend allows the insurer to control the sales and customer touchpoint process and reap commission off of their and other insurer product sales.
Q: In insurance M&As, what role does technology play in influencing companies' decisions?
A: Johnsen, TCi Consulting & Research: We do not believe that technology plays a role in determining whether an insurance company is a target for acquisition. Technology is important and is one of a number of functions that needs to be examined before a deal is finalized. The acquiring company needs to know what they are buying, and to understand, at least from a high level, which systems they need to retain and which ones can be eliminated. A thorough due-diligence review of the IT function and the development of an integration strategy are critical to the success of any merger. The cost to perform the IT integration could be too high and cause the deal to fall apart or to reduce the offer price.
A: Harris, Gartner Research: Technology is a key enabler of M&A. After the dust settles, technology is a fundamental tool required to integrate the combined company. This is true for both systems and data. Without technical integration, the resulting company cannot experience the benefits of M&A. Integration inability has been a primary challenge for insurers. For example, creating a common customer information file across different lines of business is still a key challenge for most diversified insurers. Systems incompatibility and data management continues to create barriers to success.
Q: Once the M&A decision is made, what role do technology executives typically play in the post-merger organization?
A: Johnsen, TCi Consulting & Research: Technology executives need to have the IT integration plan well thought out, with a staffing plan in place for the combined organization, and to be ready to work the plan on day one. Make sure the right people are in place to get the job done. A project plan needs to be developed to carry out the integration of the IT functions. Individual projects should be prioritized together with the business executives and everyone should understand that not everything can be done at the same time.
A: Josefowicz, Celent: Different enterprises handle this differently. Some organizations maintain parallel IT groups for different post-merger business units, while others combine and standardize IT across the enterprise. While the latter is generally a more strategic move, it can involve disruptive reorganizations and technical realignments. However, as insurers focus more on profitable operations, we expect to see more companies take this strategic step.
A: Saccocia, TowerGroup: Executives must be involved in the integration process of the post-merger insurer to ensure that merger plans meet the business goals and objectives and to position technology as a weapon for competitive differentiation. Successful mergers include an executive steering committee comprising business and IT leaders who will execute long-term integration planning.
A: Harris, Gartner Research: Critical involvement of technology management must start pre-merger to ensure system, data and process compatibility. During the transition, there needs to be an established governance model, enterprise architecture planning, systems consolidation, and process standardization. Each of these steps will help the organization to achieve the desired business outcome.
Q: How should IT leaders decide which duplicate systems will survive the integration stage?
A: Josefowicz, Celent: There are no universal absolutes about which technologies should stay or go. Even technologies that some might consider outdated or clunky might have some redeeming value within a specific context. In general, though, when planning a cross-enterprise standardization, technology executives should consider what Celent calls the "AAAA Rating for Technology"-alignment with business strategy, accessibility of systems by various stakeholders and other internal and external systems, agility of the system to adjust to changes, and affordability for both implementation and maintenance.
A: Saccocia, TowerGroup: Integration decisions made for short- and long-term gain must work in concert with the business goals. Therefore, unbiased criteria for assessing infrastructure, applications, data, and architecture must align with those objectives to include profit, revenue, cost control, and improved services. The executive steering committee should set parameters for integration teams to make objective, fact-based decisions. The technology that survives is that which can support the business over the long term and manifest competitive differentiation, among other key measurements that play a role in defining the new company's success.