Stephanie Mocatta explains how the pitch process has changed in the past three years
An awful lot of people have made an awful lot of money writing books about the pitch process for acquiring new business.' This statement probably doesn't come as a great surprise to many insurance professionals; a quick trip to any business bookshop will reveal shelves groaning under the weight of 800-page tomes on self-confidence and mastering your giant within.This fascination with pitching is understandable. After all, it represents the culmination of the new business process; the tip of an iceberg that is months of activity. These books leave the impression that for some, the pitch process is all about adrenalin and psyching up, the business equivalent of a 400 metre hurdles race. For others, pitches are all about attention to detail, slavish due diligence and working late into the night.Three years ago, I wrote an article for Global Reinsurance which examined in detail the pitch process for the acquisition of insurance companies in run-off. The information I used didn't come from books; it came from the experience my colleagues and I at Omni Whittington had acquired while bidding for a range of insurers such as Crombie, Americas Insurance and Reliance National Europe. But in the three years that have elapsed, the pitch process has undergone some subtle, yet important changes.
The pitch processAs a first point of reference, it is sensible to map out the key stages of the new business pitch process as they are today - and indeed as they were three years ago. The basic steps of the process have not altered, although the time each one takes has grown for a number of reasons. In simple terms, the steps tend to be:- identification of a possible target for acquisition;
- initial approach;
- confidentiality agreement;
- sale memorandum;
- deadline for a preliminary bid;
- due diligence;
- second bid;
- exclusivity period;
- further due diligence; and
- final negotiations.
If ever there was a word to strike fear into the heart of a company seeking to buy insurers in run-off, it's 'regulation'. But over the last three years, regulation has been a relatively benign factor in influencing the pitch process. Yes, there have been significant changes to the industry as a whole, but these have had little impact on the pitch itself.Potentially, the most far-reaching regulatory change is really a change in attitude on behalf of regulators and the industry itself. In the UK, the Financial Services Authority (FSA) has grown in stature and in ambition.Its increasingly tight grip on the insurance industry - and the reaction to a series of high level corporate failures such as the collapse of Independent Insurance, Equitable Life, Enron and WorldCom - has led to a risk-based approach focusing more on the fitness and competence of key individuals.Chests have been puffed out and tough words spoken. While the rules themselves have changed little in relation to the pitch process, a new mood of caution inspired by the FSA's approach has led to a general slowing down of the process and an even greater desire to check the small print.Internationally, the picture is slightly different. The increasing tendency for regulators from different countries to share good practice with one another is helping to homogenise international regulation. This is a positive change; it is far easier to play a game in which the rules are the same the world over. The increase in communication between regulators is also a boon to well-managed, professional bidders. Companies that have a bad reputation in a single territory are now finding that they have bad reputations globally - and that leaves the pitch process open to the quality players.
TechnologyAt the very highest levels, technology's impact on the pitch process has been minor, but when it comes to the details of the work, technology is the lubricant that oils the wheels of a bid.The key benefit of technology is the ability to communicate between the bidder and vendor, which may be situated on opposite sides of the world.Omni Whittington has been involved in considerable amounts of work in Singapore and Mongolia recently, so the proliferation of mobile communication, and the internet has been of huge value.For a bidder with international offices, technology allows the working day to be extended. A bid document being prepared in an office in London can, at the end of the day, be emailed to colleagues in New York or San Francisco to continue working into the night, UK time. This has the positive affect of allowing work to continue around the clock in some cases.The downside of bid documents orbiting the world is what has become known as the curse of track changes. Without wishing to be sued by Bill Gates et al, I think it's fair to say that many people are unfamiliar with the finer points of the 'track changes' feature of Microsoft Word, leading to problems. Things are made visible which shouldn't be and vice versa.This is something that any bidding company should be very careful about.Lawyers have always played a major role in the bidding process and it's hard to foresee a time when they won't have. While the law itself has not altered significantly, the role which some lawyers are playing has.When run-off managers purchase an insurer in run-off, they generally do so with the intention of ultimately closing the company down. Both purchase and final closure require considerable legal input, so it has been interesting to note that several firms of lawyers now tender for both stages of the process at the outset. This speeds up the process and reduces legal costs, as joint tenders are inevitably cheaper than two separate tenders for two distinct services. The key is for a bidder to locate a legal firm capable of handling both sale and closure.
Market conditionsIf anything has contributed most to the lengthening of the pitch process, it is the glut of new investors in the market seeking to become involved in deals.In contrast to three years ago, today there is an awful lot of private equity funds and venture capitalists looking for somewhere to invest their capital. With its recent healthy returns, the insurance sector has caught their eyes, but the problem is that these new investors have little real understanding of the true nature of the business. In particular, they fail to see that, unlike a factory which is a physical asset and can be sold off, both the asset and liability side of an insurance company's balance sheet are vulnerable. Many of those assets will be reinsurance collectables with question marks hanging over them.The proliferation of these funds seeking to get a toehold in the industry has led to an increase in the number of bidders for companies in run-off.This, in turn, slows down the bid process and can generate additional stages of the process - more hoops to jump through, so to speak.Market conditions are also responsible for the growing number of companies in run-off for sale. Falling equity values, poor underwriting and downgradings from ratings agencies have all helped to push more businesses over the line, thus creating opportunities for buyers looking for run-off acquisitions.
New marketsThere's no doubt that the key market to have opened up over the last three years is the Far East and Pacific Rim - countries like Australia and Singapore - and that has meant a change in business approach. While the main stages of the bidding process remain the same, the manner of conducting them in the Far East is very different. The US business community is well known to be very direct in its wishes - brash, some might say - and the deal is always concluded in a clear, straightforward way. However, in Singapore, for example, a different cultural norm leads to an extremely polite manner of doing business, but one that is very detailed with constant small changes to what previously seemed like agreements. Singaporeans seem to indulge in polite negotiation until the bitter end. As they say in Singapore, a deal's not a deal until it really is signed.
SummaryThe last three years have seen the new business pitch process subject to a range of factors which, if not earth-shattering in their implications, have skewed the process and generated a new emphasis on regulatory approval.While new technology has led to a marginal increase in speed, this has been cancelled out by large number of new investors clogging up the process.Perhaps most significantly - and most positively from a bidder's perspective - today's marketplace is more active than that of three years ago and provides substantially more opportunities for bidders seeking insurance companies in run-off. A healthier marketplace can only be good for the industry and good for potential bidders. So perhaps with all that activity in mind, it's time to write a book on the subject.Stephanie Mocatta is Business Development Director for Omni Whittington, a London-based specialist in insurance solutions and run-off.