While merger and acquisition deals between managing general agencies and wholesale brokers are becoming commonplace, a key component, the specialty carrier, is sometimes left out of the equation until after the fact.

Several players expressed apprehension about various aspects of M&A activity in the E&S/specialty sector during a session of AAMGA University East in Philadelphia last month.

Paul Springman, executive vice president of Glen Allen, Va.-based Markel Corp., noted that the deal value is dependent on business provided by carrier partners.

From a company perspective, he doesn't understand why a prospective owner “makes the carte-blanche assumption that [carriers] are going to be there when they walk in and say I'm the new owner.”

He added, “Every deal presented to a company after the fact causes consternation, heartburn and great difficulty.”

Tom Nerney, president and chief executive officer of United States Liability Insurance in Wayne, Pa., told members of the King of Prussia, Pa.-based American Association of Managing General Agents that he's been blindsided by deals his company's GA partners have entered into this year.

“We had three customers since Jan. 1 who were purchased and just sort of assumed that we were going to go along,” he said. “We ended up canceling” those contracts. He noted that although one of the acquired GAs had a spectacular year with USLI in 2007, “we just didn't want to do business with the new owners.”

What surprised him, he said, was that carriers “used to get advance notice about someone selling. It would give us some time to work with them–to know about the new buyer ahead of time.” He added that “now, we're finding out 30 days later–'P.S., we sold effective Jan. 1 to somebody else.' That puts us in an awkward situation.”

He warned insurers that don't know the buyers to carry out extensive due diligence. “We'll ask you to come to our office. We take it as a new appointment,” Mr. Nerney said. “We have to assess it based on the people and their reputation.”

As for their own M&A appetites, Mr. Nerney observes buying activity from the sidelines, while acquisitions of insurers and programs continue to be a central part of Markel's strategy.

Seven of Markel's eight business units were acquired, Mr. Springman reported. But even an experienced dealmaker faces challenges. He recounted the company's experience with Terra Nova–Markel's largest acquisition.

“The one thing we missed by a wide margin was difference in cultures,” he said. “We couldn't even get agreement on how to define underwriting profit.” He noted that nearly two-thirds of the members of Terra Nova's management team walked out or left by Markel's invitation because they were unwilling to accept Markel's view.

While cultural divides can crop up under Markel's model–a model that involves buying troubled companies and actively managing them back to health–they aren't a given in every acquisition, Mr. Nerney said. He provided the perspective of an executive of a company acquired by Warren Buffett, chairman of Berkshire-Hathaway Group.

Mr. Buffett is proud of the fact that he's never had a CEO of any of his 58 companies quit, Mr. Nerney reported. “How does that happen? He never gets any of the 58 in the same room,” he said. “There are 58 different companies with 58 different cultures, [and] we spend no time on integrating culture, systems or benefits. It's not even a conversation.”

(Editor's Note: Mr. Nerney spoke prior to the resignation of General Re's Joseph Brandon, which had nothing to do with cultural issues.)

At Munich Re, a cultural difference spanning two continents–Europe and North America–is ever-present, but not insurmountable, said Paul Goodwin, client executive for the National Clients division of Munich Re America in Princeton. N.J.

Mr. Goodwin said the German reinsurer's recent acquisition of American Modern, a U.S. specialty insurer, faced a very different challenge that's unique to a reinsurance company acquirer. “We spent a lot of time seeing where that acquisition would conflict with our existing client base,” he said.

“I can assure that we had some conversations with our existing [insurance company] clients wanting to know why we were doing that and telling us the error of our ways about us making that acquisition.”

He added, “They were worried about us entering their space–that is a valid concern.” Mr. Goodwin believes, however, that conflicts on present and future business will be minimal.

For MGA perspectives on acquisitions of program administrators by insurers, see related article, “Program Managers, Specialty Insurers Warn Of M&A Consequences.”

Special Reports /

Specialty Carriers Wary Of Stealth M&A Deals

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