Power Brokers of Negotiation
Spurred on by low interest rates and an appetite for scale, business leaders in 2015 sought to create market heft through mergers and acquisitions.
Winners of the 2016 Risk & Insurance® Power Broker® award were right there with them; marrying risk management cultures, ironing out coverage gaps and redundancies, and getting the insurance carriers to behave on price.
Alex Michon, a Sacramento, Calif.-based senior vice president with Aon, is a 2016 Power Broker® in the health care category. In a health care system merger that came out of the gate as a fire drill and then dragged on for months, Michon was reminded of a key M&A consideration: the human cost in acquisitions is often underestimated.
That’s something commercial insurance brokers need to keep in mind if they are going to build productive relationships and achieve the goals of both the buyer and the seller. Many times the risk manager for the acquired company is losing his or her job. Yet they still have to perform at the top of their game to bring off the deal.
“I think the human cost is usually under-represented in terms of the stress that these people are going through,” Michon said.
In these cases the broker can be a friend to the risk manager, who might not be first in the thoughts of finance executives or other company leadership. The risk manager might be driving in to work every day, knowing that a merger is underway and be unable to tell colleagues about it; even though hundreds of jobs may soon be on the chopping block.
“We are one of the few people who can openly talk to them,” Michon said.
In most cases, Michon said, the risk manager will perform admirably, giving the brokers and carriers all the information they need to be able to write the risk of the combined companies.
But Michon has seen cases where risk managers became so concerned with their futures that they put most of their energy into job hunting.
That tension can also impact dialogues with brokers who are working on a target company account, according to Arthur J. Gallagher’s Amy Sinclair, a 2016 Power Broker® in the pharmaceutical category and a veteran of many merger deals.
“Employees of the target company are concerned about redundancy at the acquisition partner,” Sinclair said.
“There is a good chance they may no longer have a job once the transaction closes,” she said.
Smaller brokerages that don’t have a lot of experience with M&As may dig in their heels a little bit.
“Generally speaking, brokers for the target and acquisition partner work well together,” Sinclair said.
“Regardless of what side of the transaction you are on, you still want to provide the best service to your client. It is not in anyone’s best interest to withhold information or to be uncooperative,” she said.
The broker’s burden of relationship maintenance in the case of an acquisition also extends to those that underwrite the risks — the carriers. There is a lot of work to be done to convince the carrier that the risk they know won’t change when one company acquires another.
Marsh’s Herman Brito Jr., a 2016 Power Broker® in the marine category who places cargo and inland marine policies, played a part in two blockbuster deals in 2015; the acquisition by General Electric of the French electric railcar maker Alstom and the marriage of global food giants Kraft and Heinz.
Marsh was new to the Heinz account when the Kraft merger loomed. Pre-merger, Brito convinced Heinz to ditch its captive for global cargo exposures and transfer the risk to AIG. Even though Marsh wound up with both accounts, the rules of broker-client confidentiality meant that Brito couldn’t call his colleagues in Chicago — where Kraft is based — and check up on Kraft’s loss history.
Brito is a big fan of AIG’s multinational placements, calling them “best in class.” His challenge was to make sure that Kraft benefitted from the same aggressive terms he was getting for Heinz post-merger. As the cargo broker, Brito knew that the carriers had bigger concerns about things such as combined property exposures than what he was placing.
“Not only am I asking you to make it clear and concise for Heinz/Kraft, let’s make it easy on ourselves by implementing a mergers and acquisitions clause and a multi-year rate agreement,” Brito told the underwriters.
“It took a tremendous effort to change the structure that was in place in August 2014, and to obtain the coverages implemented in May 2015, but when claims occurred they started to see the benefits in certain coverages and why we pursued those,” Brito said.
“I think the human cost is usually under-represented in terms of the stress that these people are going through.” — Alex Michon, senior vice president, Aon
The General Electric/Alstom merger was another kettle of fish.
“GE’s acquisition of Alstom was the hardest acquisition I have ever done,” Brito said.
General Electric has a highly centralized risk management department, four risk managers handling the entire global program. Alstom had up to 30 risk managers, many of them with local authority.
Another difference was that General Electric has a huge retention and Alstom had more of a “trading dollars” philosophy, spending so much on premium against so much in expected losses.
Brito needed to convince the carrier that when GE bought Alstom, the cargo risk management programs would become one. Initially, the insurer wasn’t buying it. But eventually Brito convinced the underwriters that once the companies were married, Alstom’s standards would come up to GE’s.
Part of Brito’s job was to make sure he was available at any hour of the day to answer questions from Alstom risk managers around the globe and help them buy into the GE program.
“If you demonstrate that you are willing to have conference calls at a time that is most convenient in India, people are more willing to do what you are asking them to do,” Brito said.
The GE/Alstom deal closed in November of 2015. Brito was still spending a lot of time on it when we spoke to him in January.
Marrying risk management cultures in a merger is a must; having the tools and the drive to convince carriers to take on the combined risk is crucial; and so is conducting enough due diligence to manage risk and provide adequate employee benefits when two very different company cultures get together.
Consider the challenges faced by Eric Wittenmyer, a 2016 Power Broker® in the health care category.
Wittenmyer, a senior vice president with Aon based in Chicago, was tasked with ironing out employee benefits for a large hospital system merger involving thousands of employees. One of the organizations classified hundreds of their employees as executives, eligible for a special category of benefits. The other organization counted slightly more than a dozen executives in a similar category.
“What we did was a tremendous amount of benchmarking, and an awful lot of cost modeling,” Wittenmyer said. That science determined that the hospital with the smaller group of employees classified as executives was closer to the norm.
Then came the art. That was figuring out how different employees perceived the value of certain ancillary benefits, such as life insurance and disability benefits.
Once that was determined, the in-house benefits team, with Wittenmyer’s guidance, offered one-time cash payments to employees who felt they were having a guaranteed benefit taken away, while still offering them access to an employer supported program; just not one in which the employer paid for the whole nut.
“So once we had done all of the plan design work, we had to manage significant transitional coordination issues,” Wittenmyer said.
Because coverage of certain benefits for the merged entities was taking effect on a staggered schedule, with some benefits being in place Jan. 1, for example, and others March 1, Wittenmyer had to earn the trust of underwriters who were being asked to stay on certain programs for a few months — some of them involving high potential life insurance pay-outs — without the corresponding premium income.
In the end, Wittenmyer was able to convince the carriers to work with him, with no price increases, because of the attractive size of the merged accounts.
“I think everything was as transparent as it could be and the vendors understood that,” Wittenmyer said.