Post-deal integration vital to success: Catlin
The seeds of the recent merger between XL and Catlin were planted some three years ago when the leaders of the firms concluded that consolidation was inevitable and looked to get ahead of the game, Stephen Catlin, executive deputy chairman, XL Catlin, told delegates at Guy Carpenter’s annual Baden-Baden symposium yesterday (Sunday October 18).
In a session called ‘Consolidation: who wins the race for scale?’ Catlin walked delegates through his first-hand experience of mergers& acquisitions (M&A), discussing both Catlin’s acquisition of Wellington in 2006 and the more recent deal between XL and Catlin.
Catlin said that in a conversation with Mike McGavick, the chief executive of what was XL Group, some three years ago, they agreed that consolidation was inevitable and would start in around two years. That discussion led to talks that would ultimately see the businesses combine.
The two executives spoke privately about a potential deal for some 18 months before they involved anyone else. “We wanted to make sure the principles of how it would work were thought through and that we shared the same key values,” he said.
He admitted that consolidating the two companies had not always been easy. “Things probably look better from the outside than they do from the inside,” he said. “We are like a swan, moving gracefully on the surface but paddling like hell underneath the water.”
He ran delegates through some of the lessons he had learned in relation to M&A, including that across all industries, research shows that more than two-thirds of acquisitions do not deliver value to shareholders in the long term.
The first reason for this is that the price is wrong, which in the case of re/insurers usually means the reserves are short. The second reason is companies are not integrated quickly enough.
“Case studies show that companies should integrate 75 percent of operations in the first year and the rest in the second,” Catlin said. “When we bought Wellington, we aimed to do 75 percent within six months, to give ourselves room for manoeuvre. In fact, we did 85 percent in six months, but the last 15 percent took every bit of that final 18 months and was tough to achieve.”
He stressed that, when it comes to M&A, it is not a case of one size fits all, and not all deals will work for all companies. “I believe consolidation is inevitable and it will continue in this industry for several years,” he said. “But it is not right for everyone. There must be a strategic reason behind it and execution is key.”
Other speakers agreed with these sentiments. Introducing the session, Nick Frankland, CEO, EMEA, Guy Carpenter, warned of the pitfalls of M&A and the tough lessons the industry should recall. He reminded delegates of the downfall of Gerling Global Re—once one of the world’s biggest reinsurers, the demise of which can be traced back to its acquisition of Constitution Re in 1998.
“We saw a similar spate of M&A in the latter half of the 1990s and some spectacular failures following that,” Frankland said.
John Doucette, chief underwriting officer, Everest Re, added that M&A is not suitable for every company and is not necessary for reinsurers that already boast a global reach.
