Senior executives of Royal & SunAlliance USA: from left to right, Terry Broderick, president; Larry Simmons, president, commercial insurance; Marty Becker, president, specialty insurance; and Jim Pouliot, president, personal lines.
In this era of mega-mergers and consolidations in the insurance industry, there have been some less than happy marriages of titans. Massive layoffs, culture clashes, and operational chaos just scratch the surface of the malaise that often accompanies the drive to become the biggest and the strongest.
Size and strength unquestionably are major factors in any insurer's decision to grow via acquisition, and they certainly were key considerations in Royal & SunAlliance USA's initiative to find a merger partner. Beyond that, however, the company's top management team resolved from the start to place a high priority on the human factor--and that's why, before even making a list of potential merger candidates, the company sought the counsel of those on whom a merger arguably would have the most significant impact: its producers.
In this article we'll talk with top executives of Royal & SunAlliance to learn how the company chose its merger partner, Orion Capital Corporation; the steps it took to ensure a smooth transition; and the results of its ongoing consultation with its agency force. Providing information for the article are Terry Broderick, president; Jim Pouliot, personal insurance president; Larry Simmons, commercial insurance president; and Marty Becker, specialty insurance president.
Ranked among the top 25 U.S. property/casualty insurers, Royal & SunAlliance USA is part of the London-based Royal & Sun Alliance Group plc, which transacts business in more than 130 countries and is one of the 10 largest multiline insurers worldwide. Royal has operated in the United States for about 150 years; its British parent traces its history back some 300 years.
Accountability and commitment
"Our mission starts with our goal as an organization," Broderick explains: "to be the very best property/casualty company in our industry. To do that, we must have the best customers, who can help us achieve superior results on a consistent basis, with combined ratios under 100. To attract these customers, we must provide value in different ways." At Royal, Broderick says, "The real differentiator is people. Our people have a high level of expertise in the products they sell. They have accountability, in terms of ownership of their careers and the success of the organization. And they have a positive attitude about what they do; they truly care about our customers. We're very much a relationship company; we work closely with both our producer customers and our end customers."
Given its focus on people, it's not surprising that Royal & SunAlliance USA has an active and engaged agent forum. "We formed the National Producer Roundtable 10 years ago," Broderick says. "It meets formally twice a year and conducts other dialogues with us on an ad hoc basis. Before embarking on the Orion transaction, we sought their counsel. Prior to that, we'd engaged the Roundtable with respect to charting our direction and future. In the spring of 1998 we conducted a wide-ranging self-appraisal to develop strategic initiatives that would help us achieve leadership status in the industry. We received a lot of feedback from the Roundtable on the nature and elements of our strategies, and this helped us refine those strategies."
Acquisition advice from producers
As noted earlier, when Royal & SunAlliance USA decided to seek growth via acquisition, management turned to the National Producer Roundtable for input. "Our producers gave us good counsel on our acquisition strategy," Broderick says. "Initially they said, 'If you can avoid making an acquisition, please do.' Our producers have had to deal with other acquisitions that didn't go well, and they didn't want to repeat the experience with us. Producers then told us, 'If you can't avoid making an acquisition, seek a complementary partner, not a duplicate of Royal.' They also urged us to work toward a smooth transition that would allow us to continue providing a high level of customer service."
To top management, seeking the Roundtable's advice made good business sense. "They helped direct our attention toward finding a complementary partner," Broderick says. "What manufacturer would develop a new product and implement a marketing strategy without first talking to its distributors? To us, consulting producers was logical. Our success depends on our producers."
Choosing a partner
Before deciding to acquire Orion Capital, Royal & SunAlliance USA identified 300 potential acquisition candidates. What factors did management consider in evaluating these companies?
"We developed several strategic imperatives that would drive our choice of a partner to help us achieve our goal of industry leadership," Broderick explains. "First, we sought a better balance in our portfolio. We are very committed to the middle market, but we were more heavily weighted there than we would have preferred. We wanted to establish a stronger presence in the personal lines and specialty arenas. Second, we sought to broaden our geographic reach. Royal & SunAlliance operated predominantly east of the Mississippi, with a concentration in the Northeast. We wanted to achieve a greater geographic balance nationwide. Third, we saw a need to develop more balance of distribution. We wanted to be supported by additional producers in the regional and larger independent agency categories."
It's no secret, as mentioned earlier, that a major reason companies pursue acquisitions is to enhance their size and strength in the marketplace. Those certainly were important considerations in Royal & SunAlliance USA's decision to seek a merger partner, Broderick comments. "We wanted to achieve greater critical mass," he declares. "We had premium volume of $1.5 billion--not small, but not large enough to completely support an infrastructure that could provide the products and services we wanted to deliver."
The reality of Royal's merger with Orion At the beginning of the article we pointed out that many acquisitions are made with little regard for the cultural "fit" between two entities. "A key factor for us was cultural compatibility," Broderick emphasizes. "This factor is sometimes undervalued when companies look at acquisitions. The products may be complementary and the financial aspects may be favorable, but can the companies coexist compatibly and prosper from a cultural standpoint? "
To find the ideal merger partner, Royal & SunAlliance USA evaluated no fewer than 300 candidates with respect to the criteria outlined above. "In that process, the company that came out on top was Orion Capital," Broderick says. "They had a strong presence in the West and Midwest; they had solid representation by regional and larger independent agencies; and they were equal to us in size." What's more, "They had significant market presence in such lines as workers compensation and nonstandard auto. And they approached the business and their customers much as we do, so there was cultural compatibility."
Synergy and strength
The merger of Royal & SunAlliance USA with Orion Capital Corporation was officially completed in mid-November of last year. What does the combined entity look like? "We have three viable, competitive businesses," Broderick says. "Our Personal Insurance Division, which writes nonstandard, standard, and preferred business, has premium volume of $1 billion. Our Commercial Insurance Division, with $1.5 billion in premium, has risk management and mid-market capabilities. Our mid-market combines the monoline capabilities of EBI (Orion's workers compensation unit) with the multiline capabilities of Royal & SunAlliance. The Specialty Insurance Division has gross premium volume of $1.5 billion and brings together nine specialty business units from Orion and seven from Royal. Orion's Design Professionals Insurance Company (DPIC) has 45% of the market for architects and engineers professional insurance. Our combined operation is truly a global player: we write business in 130 countries. We're using the Royal & SunAlliance name but are retaining the marketplace names of Orion's specialty products and services."
The "value proposition"
How does the combined organization seek to position itself in the marketplace? "For each of our businesses, we have a value proposition: something we offer our customers that really addresses their needs," Broderick responds. "We develop the value proposition by listening to our customers--both insurance buyers and agents--and acting on their needs. In personal lines, our producers place a high value on ease of doing business with us, so we've made a commitment to achieve that goal. In workers compensation, our value proposition is to protect the targeted American businesses--to help manage business risks and costs and maintain a safe working environment. In the specialty arena, our value proposition is to recognize that each customer segment has its own needs, and to address those needs with appropriate products and services."
Now let's take a closer look at how each of the combined entities' three divisions is dealing with the challenges and opportunities created by the merger.
Personal insurance
Heading up the Personal Insurance Division is Jim Pouliot, who had been executive vice president of Orion. As a result of the merger, he says, Royal agents now have access to a high-quality nonstandard auto market through OrionAuto, while OrionAuto producers can offer their clients Royal's comprehensive portfolio of standard and preferred auto products. In the homeowners arena, Orion's flood product will be made available to Royal agents. "Orion is the 14th largest provider of flood insurance through the federal government, so agents can marry this product with Royal's homeowners product and vice versa," Pouliot explains. Plans also call for the development of a renters policy. Other product offerings are umbrella, inland marine, boat, and dwelling fire. OrionAuto operates in 37 states; the 13 states in which it is not active are in the eastern part of the country, where Royal has a strong market presence. "The merger clearly brings us expanded geographic opportunities," Pouliot observes.
At Royal, whose personal lines products are geared for the standard and preferred markets, there's considerable contact between agent and insurer as well as between agent and client, he notes. Orion's nonstandard auto business, in contrast, is of necessity a commodity operation where price drives the decision-making process. In this "low-touch" line, Pouliot explains, there's much less reliance on strong relationships among agent, client, and insurer.
The combined organization is represented by some 15,000 independent producers nationwide and, Pouliot emphasizes, "is totally independent agent oriented. Our goal is to become the carrier of choice for all of our agents." A key post-merger objective for the personal division, Pouliot says, is to maintain and expand the corporate philosophy of ease of doing business.
The presidents of Royal & Sun Alliance's three insurance divisions: from left to right, Marty Becker, specialty insurance; Larry Simmons, commercial insurance; and Jim Pouliot, personal insurance.
Because of the significant differences in the marketing and administration of nonstandard vs standard and preferred business, Pouliot says, the combined organization will maintain separate claims organizations with some shared services. Likewise, the organization will maintain separate field marketing resources with coordinated efforts, and will maintain current agency service/customer service models.
Commercial insurance
Heading up the combined organization's Commercial Insurance Division is Larry Simmons, a 30-year veteran of the insurance business who has been with Royal & SunAlliance for 12 years. He presides over a division that accounts for over $1.5 billion in premium volume and is divided into two units: Mid-Market Business and Risk Management & Global Business. Six support groups assist these business units: Underwriting, Administration & Finance, Information Technology & eBusiness, People & Culture, Accident Prevention, and Marketing & Producer Relations.
In the Mid-Market unit, Simmons explains, "The opportunity for Royal & SunAlliance relates to a segmentation strategy that provides intense focus on our customers." Target mid-market risks include manufacturing, health care, and service industries. The unit, which comprises some 75% of commercial lines volume, operates under the direction of Ray Jacobsen, former chief executive of Orion's EBI. Under Jacobsen's leadership, EBI's Zero Accident Culture® (ZAC) will be expanded as part of the organization's total client solution. ZAC, Simmons explains, "is based on the fundamental belief that accidents are costly, preventable, and unacceptable in today's workplace. We make a commitment to our clients and their employees to protect their workplace and improve productivity."
The Risk Management & Global Business unit, under the leadership of John Tighe, seeks accounts with sophisticated risk managers and qualified intermediaries and attempts to align them successfully with highly proficient underwriting, accident prevention, and claims personnel. In this unit, "We look for clients who value the services we can provide in risk improvement and cost reduction," Simmons explains. This unit accounts for about 25% of volume in the commercial lines division.
The merger with Orion makes Royal & SunAlliance a top-tier player in the workers compensation market. "Before the merger, Royal had a significant workers compensation presence itself," Simmons notes. "As a result of combining with EBI, more than 50% of our commercial book is now workers comp, and we rank among the top 15 workers comp carriers in the United States. We're a much stronger and more focused organization because of our substantially increased presence in workers compensation."
Thanks to the merger, "We're a stronger, larger organization. In the commercial division, we offer our clients a combination of local touch and global reach," Simmons says. "With EBI, we've gained more U.S. locations; through Royal, we're able to do business around the planet." In addition, he comments, "Having more independent agents enhances our ability to distribute our products and offer more solutions to our workers compensation buyers. The merger has increased our producer representation by about two thirds."
Looking ahead, Simmons says, "We see a great opportunity. The business is highly competitive, but we're confident we can succeed by identifying what customers want and providing it. We see an important segment of buyers who place great value on our ability to deliver solutions beyond insurance. We're committed to building for the future with the best people, the best products, and the best business model."
Specialty division
Royal & SunAlliance's Specialty Insurance Division, with gross premium of $1.5 billion, operates under the leadership of Marty Becker, who formerly served as chairman and chief executive officer of Orion and before that as president and chief executive officer of its Design Professionals Insurance Company subsidiary. The specialty division consists of 16 different businesses that are organized into three broad categories: Wholesale, Professional, and Financial. "Each business unit operates as an autonomous profit center and has dedicated managers who specialize in that particular niche," Becker explains. "We've found this structure works best in responding to the needs of specific markets." The specialty division uses both wholesale and retail distribution systems, depending on the needs of particular market segments. "No one distribution system would be appropriate for all specialty markets," Becker notes. "We use wholesale and retail agents, MGAs, and program administrators."
In the wholesale segment, Becker says, "We encounter a crowded marketplace with a wide range of players. We compete by offering distinctive, value-added programs and providing expertise for tough risks." In the professional segment, he says, "We are very highly specialized: architects and engineers, accountants, lawyers, grocers." With a market share exceeding 40%, Royal now dominates the architects and engineers arena through Orion's DPIC subsidiary. In the financial segment, offerings include warranty, credit enhancement, and equipment maintenance coverage, as well as alternative risk solutions. This market segment, Becker says, is still growing rapidly because it is not yet a mature market. "Products and services for this market are the
latest evolution of the uses of property/casualty insurance," he remarks.
The merger offers the combined organization a host of cross-selling opportunities, Becker observes. For example, he says, "Design Professionals sold only professional coverages and left the rest of the business on the table. Royal has products to wrap around the professional coverages."
Internet technology plays a big part in the specialty division's plans for the future. "Each of our business units has developed or is developing Internet capabilities to make it more accessible to the market, and easier and faster to do business," Becker says. "Virtually all of these initiatives are teamed up with a distribution system; we see very little value added by using direct marketing. We want to help our producers provide better service via enhanced electronic interface."
The specialty division is pursuing an ambitious goal of doubling its volume in the next three years from its current $1.5 billion, while maintaining combined ratios in the 90s. "Ultimately, the key to prevailing in the marketplace is a combination of speed, quality, and a fair price," Becker says. "The more we can position ourselves to offer a good product at a reasonable price with fast access to service, the better our chances of succeeding in the specialty marketplace."
Beyond expectations
Even under the best of circumstances, mergers can have unintended and unfortunate consequences for the participants. That definitely has not been the case with Royal & SunAlliance and Orion Capital. From the start, President Terry Broderick says, "We were committed to creating the best possible organization. Everyone talks about this, but too often the acquiring company vanquishes the acquired. We wanted to take our two good companies and create a better company. We resolved to choose the best people and the best systems, regardless of heritage. As senior management, we had to convince our shareholders, customers, and employees of the value of spending a substantial amount of money to make this acquisition, and we realized that the proposed transaction created high expectations. Once the decision was made, the more I saw up close the potential of the combined organization--its people, products, management, culture--the more I felt that the reality was even better than the expectations." *
©COPYRIGHT: The Rough Notes Magazine, 2000