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Risk managers at companies involved in mergers and acquisitions face challenges in consolidating insurance programs but can also help the transactions run smoothly and spot potential problems, if they are given a seat at the M&A table early, experts say.
Beginning with the due diligence process, risk managers can play a central role in preparing for a merger or acquisition, and contribute to the process with insurance advice or purchases to help differentiate a bid, sources said.
The number of M&As in North America soared over the past couple of years, with 18,576 deals in 2017 and 17,581 in 2018, compared with 12,882 in 2013, which was the lowest year since 2009, according to the Institute of Mergers, Acquisitions and Alliances, a New York-based nonprofit. But the pace has slowed in 2019 with 5,399 deals through the beginning of June.
Risk managers can bring expertise beyond insurance management to M&A planning, experts say.
“Many companies will think in terms of insurance when it comes to mergers and acquisitions, but a risk manager’s perspective is much broader,” said Audrey Rampinelli, CEO and co-founder of insurtech advisory firm OnRamp Risk LLC.
“The process starts very early on, understanding the dynamics of what your deal team is looking at,” said Ms. Rampinelli, who served as the senior risk executive leading risk management at Loews Corp. for more than 18 years and was a core member of the M&A team involved with numerous transactions through her tenure.
“As a buyer, the finance and risk manager’s diligence efforts should be prioritized,” said Greg Peterson, financial services deals leader in New York for PricewaterhouseCoopers International Ltd., focusing on “financial matters which could have a material financial impact on purchase price.” These include working capital, which is capital used in a business’ day-today trading operations, calculated as current assets minus current liabilities.
“The due diligence you do before you close on a deal, really, helps with the transitional part and the onboarding of the asset,” Ms. Rampinelli said, such as researching insurance coverages.
Risk managers generally are becoming involved earlier in the merger and acquisition process, said Matthew Schneider, co-CEO, M&A and transaction solutions for Aon PLC in New York.
“More and more, primarily with the larger firms with $1 billion in revenues or more, risk managers are getting involved in the acquisition stage, as opposed to some in the past, which became involved after the acquisition was done.”
Their involvement can help identify lurking risks and exposures in a target company, experts say.
“If brought in early enough, a good risk manager” can help identify potential environmental liabilities of an acquisition target or product exposures of the company, said John Kelly, founder and managing partner at risk consultants Hanover Stone Partners LLC in New York.
The timing of involvement is critical, he added. “Sometimes they don’t get to practice really quality risk management because it’s so late in the ballgame,” Mr. Kelly said.
Risk managers may well see new or different insurer relationships, especially for the acquired company, sources said.
“Generally, the acquiring company’s relationships will prevail,” Mr. Kelly said.
In merging the risk management and insurance programs of an acquiring company with the company being bought, there may be opportunities for synergies, but risk managers must be cautious when dealing with program cost, sources said.
“What cost reduction and risk mitigation program opportunities might exist,” Mr. Peterson said.
A target company’s risk management program may afford the “opportunity to enhance existing processes,” for a buyer, Ms. Rampinelli said.
In combining insurance programs, risk managers should consider whether a target’s insurance program offers any efficiencies, Mr. Kelly said.
For example, it might have multiyear programs that should be preserved in a hardening insurance market, he said.
More broadly, risk managers can help mitigate the effects of hardening insurance markets, according to Mr. Kelly.
“Finance people will tend to focus on historical costs, but risk managers will be well aware of insurance market trends and the potential financial impact of hardening market conditions that we are witnessing,” he said. “Not only will a hardening market impact pricing, but also potentially, available capacity for more difficult risks. Another reason why a risk manager’s involvement early on in the M&A due diligence process is important.”
A careful analysis of insurance costs should include a consideration of prospective insurance costs, said Mr. Schneider of Aon.
“When a buyer acquires an asset, how will the target’s insurance costs be modified based on the new ownership? … It’s never wise just to take the existing price and assume that has anything to do with what the future price will be,” he said.
One variable that could affect insurance costs is the existence of a captive, Mr. Schneider said, adding that any merger and acquisition involving a captive should ultimately include a captive feasibility study.
Another variable is technology, such as risk management information systems or legacy systems that may pose integration challenges, Ms. Rampinelli said.
“The important thing when doing due diligence is to really understand what the systems are; inventory them,” Ms. Rampinelli said. “Understand what the cost may be with those conversions and whether systems can be converted at all.”
Risk managers should also be involved with the purchase or placement of any transactional liability insurance, or representations and warranties coverage.
“The risk manager should be expected to manage the reps and warranties insurance process,” Mr. Peterson said.
Such transactional liability insurance may also go beyond reps and warranties to include environmental and tax coverages, Ms. Rampinelli said. “Typically, the risk manager is involved with that.”
Transactional liability coverage is an area in which existing insurer relationships can be beneficial because companies involved in mergers and acquisitions sometimes turn to existing brokers and insurers for such coverage, said Toria Lessman, Chicago-based senior vice president and head of transactional liability at QBE North America.
Further, risk managers can bring value to the transaction and raise their profile by using transactional liability insurance, Mr. Schneider said.
Securing accurate and complete historical insurance information during a merger or acquisition is a key part of due diligence but can be a daunting task, experts say.