Xuber’s White Paper Reveals Executive Insights

July 16, 2015

Xuber, Xchanging’s insurance software business which delivers solutions to the commercial insurance and reinsurance marketplace, recently gathered a group of executives on the island to talk about market conditions, innovation, technological change and analytics.

Faced with a raft of challenges such as third-party capital, soft market conditions and impending regulation around the globe, the reinsurance industry has been consolidating. Deals have been announced between some of the biggest players in the market and some of the well-known names on the island are disappearing fast.

Long-term benefits of M&A

The debate on M&A covered whether the current trend of ‘big is best’ would actually present any real long-term benefit for customers or shareholders. Also discussed was the changing role of the investor – going from savvy stock pickers 10 years ago, to passive index investors who do not really understand the sector. These key topics, and more, are covered in the Xuber white paper.

Claude Lefebvre, Chief Underwriting Officer at Hamilton Re, said that M&A is part of a cycle and tends to take place during the soft market. However, the latest round of activity seems to beg the question of whether bigger is actually better.

Robert Johnston, President at Aon Benfield Bermuda, said: “I’m not sure that being a company with $10 billion of capital necessarily provides access to much more business than being a $5 billion sized company, but in a merger situation it’s not just about scale – it’s also about creating efficiencies and widening the scope of your resources and capabilities.”

“The question is how many M&A deals actually increase shareholder value? I believe you’ll find the number is really small,” said Brad Adderley, a Partner at Appleby. “I understand an M&A deal when you buy a company with a book of business that you didn’t have access to, but I’m waiting to see if mergers of like-for-like companies in the end really make sense for the shareholders.”

“There’s many challenges in terms of making sure you have the right synergies, looking at the loss of good employees,” added Chris Garrod, Partner at Bermuda law firm Conyers. “Sometimes the potential challenges that these deals face can far outweigh the benefits.”

Culture clash challenge

A clash of cultures was seen as the number one challenge in any merger deal; combining two companies and their legacy issues is another major factor. However, it can also be an opportunity.

“If we want to move the industry to the next level, you have to start thinking about the data and the systems,” argued Richard Clark, Business Development Director at Xuber. “How do we do a better job of capturing information and use it to our advantage?

Clark continues: “The thing that we are constantly asked is how can we refresh the legacy systems as an asset and leverage the data better, rather than it being masked and buried in outdated systems and processes.

“Looking at a market like Bermuda, where there are a lot of smaller organisations that have not got many legacy systems, they are in a position to be more entrepreneurial, better able to change, and take new opportunities, versus the mega big organisations that have multiple systems and processes – all made worse by M&A.”

Investor impact

Also discussed was the idea that investors, and the desire to increase their capital base, is driving much of the current M&A activity. Investors, the capital providers to the space, do not add any value outside of the pure market data, and therefore are simply looking to increase the size of companies. In an investor’s eyes, reinsurers are simply an index-tracked fund.

“Passive index investors are the fastest growing source of capital. They don’t get involved and don’t understand reinsurance,”said Brenton Slade, Chief Operating Officer at Horseshoe Group.

“As long as you are a certain size, you fit somewhere in the index and they have to buy you to that level. Investors used to want to manage performance. It’s completely changed now – they are increasingly passive and don’t have the same demands on performance or meeting certain return or risk profiles. It’s completely changed the way that reinsurers manage their business.”

Out of any M&A activity comes opportunities for those staying out of the dance – particularly for the smaller players, who can capitalise on disenfranchised teams and new lines of business.

“It’s a great opportunity for some of the smaller players and other carriers that are not involved in M&A activity because there’s a dislocation – teams that are not happy with M&A, teams that will be let go, and a distraction by carriers dealing with M&A activities and not primarily focused on day to day operations,” said Mike Doyle, SVP at Ariel Re. “It’s up to other companies in the industry to identify these opportunities and to capitalise on those new teams and lines of business that are available.”

Other topics discussed were the use of analytics and the future of Bermuda as an offshore domicile.

Xuber’s Executive Bermuda Roundtable report follows below [PDF here]:

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