How Robots Are Helping Scientists Predict Earthquake Aftershocks

By Russ Banham


Recent advances in computing power, deep learning, and physics simulation software present the possibility of mitigating the impact of an earthquake. This is good news in light of research that predicts a cataclysmic earthquake will strike the Western United States in the near future.

Scientists at Harvard University and the Massachusetts Institute of Technology (MIT) are approaching the urgent need to minimize earthquake damage from separate fronts. Harvard researchers are focused on the use of deep learning algorithms to posit where earthquake aftershocks are likely to occur, while MIT researchers have developed a seismic wave diversion structure on a supercomputer that draws the destructive waves away from protected areas like neighborhoods and downtown business centers.

The ingenuity of the technologies is equaled by their timing. Scientists at the United States Geological Survey (USGS) predict a 99.7 percent chance of a 6.7-magnitude earthquake striking Los Angeles within the next 30 years. That’s the same magnitude of the 1994 Northridge Earthquake that killed 72 people, injured more than 10,000 others, and destroyed thousands of homes, buildings, and cars in the surrounding region, costing more than $40 billion in property damage.

The prognosis is even worse for residents of the Pacific Northwest coastal region, home to the 620-mile long Cascadia Subduction Zone, where the Juan de Fuca ocean plate dips under the North American continental plate. Seattle and Portland, both inside the zone, confront an eight to 20 percent chance of experiencing the “Big One,” what seismologists call a full-margin rupture resulting in a magnitude 8.7 to 9.2 earthquake.

Most earthquakes are nowhere near as catastrophic. Of the half a billion or so detectable earthquakes that occur across the world each year (of which about 100,000 of them are felt), roughly 100 cause significant property damage and potential loss of life, noted Robert Haupt, senior technical staff scientist at MIT’s Lincoln Laboratory. “We’re hoping to do our part in reducing the devastating impact of these seismic events,” he says.

A Seismic Muffler

Haupt is a key architect of what Lincoln Lab is calling a “seismic muffler.” The concept calls for drilling a V-shaped array of sloping boreholes hundreds of feet deep on both sides of the structures to be protected, such as power plants, airport runways, office buildings, and other protected assets.

The one- to three-feet diameter boreholes—which are cased in steel and look like a set of trench walls from above—divert hazardous surface waves generated by an earthquake away from the protected asset. By the time this destructive wave force reaches ground surface, it dissipates—much like the acoustic energy coming from a combustion engine of an automobile is softened by the car’s muffler.

Haupt and his scientific colleagues at the lab have successfully tested a variety of borehole spacing models to dissipate hazardous seismic waves. In this work, they used 3D high-performance supercomputers and physics-based simulation software, such as SPECFEM3D seismic wave propagation software and COMSOL Multiphysics Acoustic software. The team uses artificial intelligence (AI) to sift through incredibly large data volumes involving earthquake detection probability. “There’s no way you can plot up all the multiple dimensions using spreadsheets or pen and paper,” Haupt says.

The findings were impressive. “We performed a series of tabletop exercises on 3D supercomputers that indicated a V-shaped array of mufflers can decrease the ground shaking effects of a 7.0-magnitude earthquake to a 5.5-magnitude earthquake and lower,” Haupt explains. “That’s a pretty significant reduction in ground motion.”

He’s not kidding. According to the USGS, a 7.0-magnitude temblor is 177.8 times stronger (energy release) than a 5.5-magnitude quake. Lincoln Lab recently received a patent for its innovative technology and is in licensing talks with several interested parties, whose names Haupt declined to disclose. Field testing is expected to be underway this summer.

Regarding the expense, Haupt estimates the cost would be less than what real estate developers currently pay to secure a skyscraper with base isolation systems, in which spring-like pads are inserted between a building’s foundation and a building to absorb ground motions. “Based on extensive 3D supercomputer computations, we believe it would protect a lot more buildings at about the same cost,” he says.

Location, Location, Location

Harvard University’s scientists have focused their research on the location of earthquake aftershocks, which follow the main shock and can occur for weeks, months, and even years after the primary event. Although smaller in magnitude than the initial temblor, some aftershocks pack a wallop—the case with a 2015 magnitude 6.7 aftershock recorded in Nepal.

While scientists are able to calculate the magnitude of aftershocks with some degree of precision, they’ve struggled with predicting their location. To improve the odds, Harvard research scientists Brendan Meade, a professor of earth and planetary sciences, and Phoebe DeVries, a postdoctoral fellow working in Meade’s lab, collected a massive volume of data from more than 130,000 earthquakes worldwide. Using AI technology, they analyzed this database to discern where the aftershocks had occurred, mapping them across a series of 5-kilometer square grids.

The researchers then compared the findings with a physics-based computer model calculating the stresses and strains of the Earth during the main shock. The model incorporated deep learningalgorithms to ferret out specific correlations between the strains and stressors and the aftershock locations.

The next stage of the research, published in the scientific journal Nature, called for testing the outcomes against 30,000 mainshock and aftershock events. The results were promising, encouraging the value of pursuing additional research. Thanks to AI, as Meade told The Harvard Gazette, “Problems that are dauntingly hard are extremely accessible these days.”

That’s exceedingly good news for anyone living in an earthquake-prone region. And hopefully just in time, too.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

Andy Fastow and me

Enron’s former CFO and convicted felon Andrew Fastow talks with the CFO writer who first chronicled his “groundbreaking” manipulation of accounting rules.

By Russ Banham


Twenty years ago, CFO gave Enron finance chief Andrew S. Fastow a CFO Excellence Award in the category of “capital structure management.” In a feature story naming him an award recipient, Fastow said, “Our story is one of a kind.” Little did he know how prophetic those words would soon become.

I remember Fastow well, as I wrote that October 1999 story. It explored his financial wizardry in helping turn a sleepy natural gas pipeline company into a blazing energy trading firm. At its height, Enron was the seventh largest company in America; its market capitalization hit $35 billion. For the story, I interviewed Fastow, Enron’s CEO Kenneth L. Lay, and president and COO Jeffrey K. Skilling. All would soon become notorious.

Two years after the story appeared, Enron became the biggest accounting scandal in American history. The upsurge in market capitalization that Fastow crowed about had been whittled down to nothing. His financial wizardry, as it turned out, was “smoke and mirrors” designed to mask Enron’s true financial performance. The company filed for bankruptcy on December 2, 2001, putting thousands out of work. Most of Enron’s employees had invested their retirement savings in the company’s stock. Other shareholders lost billions.

A U.S. Securities and Exchange Commission investigation followed, as did a criminal investigation by the U.S. Department of Justice. Fastow was charged with 78 counts of fraud for his central role in developing the off-balance-sheet special-purpose entities that led to the company’s collapse. He subsequently entered a plea agreement, forfeited his net worth of $24 million, and served a six-year prison sentence in a federal detention center in Oakdale, Louisiana. He was released from prison in December 2011.

The CFO article on Fastow was the first in-depth piece of journalism to lay out the complex finance and accounting strategies that underpinned Enron’s meteoric rise. In the story, Fastow was lauded. Said one Lehman Brothers analyst, “Thanks to Andy Fastow, Enron has been able to develop all these different businesses, which require huge amounts of capital, without diluting the stock price or deteriorating its credit quality—both of which actually have gone up. He has invented a groundbreaking strategy.”

What I had failed to capture, in a story meant to celebrate Fastow as a CFO wunderkind, was his shrewd manipulation of the accounting rules, which was unbeknownst to me and the impartial panel of CFOs who selected him for the award. He had been the chief engineer of the deals that made Enron’s financial performance and balance sheet appear much stronger than they were.

When Enron blew up in 2001, some of the fallout struck me as the writer of the article. I received anonymous emailed death threats, perhaps from embittered employees and shareholders. Although I was simply the messenger, I still felt guilt and shame.

He’s Back

I write this prologue for a reason. Over the past two years, Fastow has been on the public speaking circuit. A few months ago, I reached out to him on LinkedIn to request an interview. In our subsequent discussions via Skype, two of his comments stood out.

One was his assertion that the factors causing the collapse of Enron are in play at other companies. The other was his contention that the Sarbanes-Oxley Act, created in 2002 to prevent another Enron debacle, will not stop another Enron from happening.

During a Skype interview, he set up his laptop so I could watch a video of his keynote speech on trust and ethics in front of 2,000 people at the “In the Black: Accounting & Finance Innovation Summit” in Las Vegas, sponsored by Blackline.

He had given presentations over the past two years to university business students and organizations of certified fraud examiners, but these were his people—finance and accounting professionals. As one finance executive in the audience later told me, “I wanted to know what the world’s greatest CFO criminal mastermind could possibly have to say about ethics and trust.”

A few minutes into the speech, Fastow walked offstage and came back. In his right hand, he was holding his CFO Excellence trophy. In his left hand was his prison identification card. He then raised both arms and said, “How is it possible to go from a CFO of the year to federal prison for doing the same deals?”

The thesis of Fastow’s presentation is rules vs. principles, his argument that someone can follow the rulebook and still fail to do the right thing. That was Fastow’s wrongdoing, according to him. “I found every way I could to technically comply with the [accounting] rules,” he told the assembled. “But what I did was unethical and unprincipled. And it caused harm to people. For that, I deserved to go to prison.”

“Legal Fraud”

In our conversations, Fastow repeated the fact that all his structured transactions were approved by Enron’s accountants, senior management, and board of directors; internal and external attorneys; bank attorneys; and its audit firm, Arthur Andersen. (That Arthur Andersen approved them is not saying much—after the Enron debacle, its auditing business shut down.) “How is it possible to have all these smart people approve these deals and end up committing the greatest fraud in corporate history?” Fastow asked me.

He then answered his own question. “The fundamental problem is this: Virtually all the safeguards that have been built into the system are compliance and legal procedures to catch rulebreakers. But rulebreakers are only part of the problem. The more insidious and dangerous problem is the rule ‘users’—the rule exploiters who find the loopholes.”

Fastow was perhaps the world’s best rule user of his time. All he needed were accounting assumptions and structured finance to transform the appearance of Enron.

There is some truth to what Fastow attests to about using loopholes. Bethany McLean, co-author (with Peter Elkind) of the book, “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron,” has stated on more than one occasion that what Fastow perpetrated was “legal fraud,” an oxymoron suggesting that a CFO can follow the rules and exploit them to such an extent that the end result is fraud.

“My just asking the question, ‘Am I following the rules?’ was insufficient,” Fastow said. “I should have also been asking the question whether or not my behavior was ethical. I may have been trying to stay within the rules, but I was also, most definitely, trying to be misleading.”

I asked Fastow if he believes other CFOs ever feel compelled to exploit the rules. He responded with an analogy about Bill Belichick, head coach of the New England Patriots, who says he uses obscure football rules to his team’s competitive advantage and to make sure it wins.

If I understand Fastow correctly, he believes human nature leads some people to do whatever they can to win, including bending the rules. The easier that is, the greater the chance of doing it.

Enron’s use of mark-to-market (or fair-value) accounting, instead of the historical cost method, allowed it to recast deals that had resulted in a loss and recognize them as future profit. “Fair value accounting is a good example of where ethics come into play, as it provides you with all these gray areas that allow for creative flexibility,” Fastow said.

Such “creative flexibility” is in play today at many companies, he added, asserting, “All CFOs believe they are really good at identifying, processing, and managing risk, but the reality is that the brain sees what it wants to see. We process risk in a biased way.”

Pressed to elaborate, Fastow offered this example to me, a resident of Los Angeles: “You realize that virtually every seismologist agrees that California is 1,000 years overdue for a catastrophic earthquake. You’re sitting on a major fault line. And yet you don’t wake up every morning worrying about your family dying in a massive quake or your net worth being obliterated. You’re processing risk in a biased way—`it won’t happen to me and even if it does it won’t be that bad.’ Your brain knows the answer you want—that you want to live in L.A. So, it dismisses or minimizes the risk.”

Making company results appear better than they are is actually not dissimilar. “CFOs know the answer they want—hitting the quarterly target,” he said. “So, their brains minimize risk in order to get there. My personal belief is that almost every CFO wants to be ethical and do the right thing, but the problem is identifying you’re in an ethical risk-creating situation to begin with.”

In other words, you can commit fraud and still be technically within the rules. What you can’t do, though, is successfully argue in a court of law that because you didn’t break the rules you are not guilty. Like Fastow, disgraced former CEO Bernie Ebbers of WorldCom learned this the hard way, when the Second Circuit Court of Appeals rejected his argument that the government had to prove violations of generally accepted accounting principles (GAAP) for his conviction on fraud and conspiracy to stand.

As the court stated in 2006, “To be sure, GAAP may have relevance in that a defendant’s good faith attempt to comply with GAAP … may negate the government’s claim of an intent to deceive. [However,] if the government proves that a defendant was responsible for financial reports that intentionally and materially misled investors, the [securities fraud] statute is satisfied.” Simply put, the intent to mislead investors signifies a criminal purpose, irrespective of accounting rule loopholes.

What It’s Worth

It’s not unusual for former convicts to leverage their “expertise” in helping law enforcement. Bank robber Willie Sutton spent his last years consulting with banks on theft-deterrent techniques. Fastow is giving talks about rules vs. principles and consulting with corporate management and non-executive board directors about corporate culture and unrecognized risks—the “dangers of the gray areas.”

These gray areas stain all regulations, claimed Fastow, including the Sarbanes-Oxley legislation. “SOX is only asking `Are you following the rules?’” Fastow said. By now his point is clear: Ethics in corporate governance, an even timelier subject these days, is crucial.

Asked what boards of directors can do to feel confident that they have a clear picture of financial results, Fastow touted the data transparency provided by finance and accounting software. He further noted the possible use of an artificial intelligence (AI) tool developed by software provider KeenCorp that analyzes employee emails for evidence of negative tension in a company.

In 2016, KeenCorp, analyzed several years’ worth of emails sent by Enron’s top 150 executives. Not surprisingly, when Enron approached insolvency, index scores fell precipitously, signaling high amounts of tension among executives. Yet, two years earlier, on June 28, 1999, when Enron seemingly was on top of the world, equally low scores were posted. The firm reached out to Fastow in 2016 for an explanation.

It turns out that on that date in 1999, Fastow had spent hours talking with Enron’s board and senior management about “LJM,” the name given the complex transactions he’d designed to hide the company’s poorly performing assets to spruce up its financial statements. The software’s analysis of emails that day intuited negative tension about the deals.

“The algorithm pinpointed the day when the most existential decision was made,” Fastow said. (Fastow has since become an investor in KeenCorp, it should be noted.)

What is one to make of Andy Fastow today? It’s a difficult question. I reached out to three finance and accounting professionals who attended the “In the Black” summit. They said he appeared humbled by his ethical lapses and had something useful to offer. However, none of them had personally suffered from Fastow’s criminal manipulations. And that’s exactly what they were.

His victims might be pleased to know that Fastow appears condemned to forever make his penance. Despite it all, though, his family held together, offering him a measure of solace. As someone linked to him in perpetuity, I’m happy for that.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

How Carbon Capture Tech Is Easing Industry’s Green Transition

By Russ Banham


Scientists on the UN’s Intergovernmental Panel on Climate Change (IPCC) commissioned by the United Nations to provide guidance to global leaders on the economic and humanitarian impacts of climate change reviewed more than 6,000 scientific studies before reaching a devastating conclusion: Greenhouse gases (above all carbon dioxide, or CO2) must be reduced by 45 percent by 2030, and 100 percent by 2050, to deter a 2.7-degree Fahrenheit increase (from pre-industrial levels) in global temperatures.

With nearly 200 countries on board, the Paris Agreement offers hope for reducing the production of greenhouse gases in the future. But more needs to be done today to avoid the dire fate the IPCC projects. As we work toward a decarbonized energy future, the widespread use of carbon capture technology will likely be an indispensable strategy in our toolkit.

Seize, store and sell

The potential of this technology to reduce greenhouse gas emissions is “considerable,” the IPCC states, estimating that carbon capture can trap up to 85 to 90 percent of the CO2 emissions produced from the use of fossil fuels in industrial processes and electricity generation, effectively preventing that CO2from entering the atmosphere.

The IPCC is not alone in its support for increasing use of this promising technology. In a 2016 report titled “20 Years of Carbon Capture and Storage,” the International Energy Agency (IEA) suggests that wide-scale use of carbon capture would result in a 19 percent reduction in global CO2 emissions by 2050. However, this projection assumes the creation of approximately 3,400 carbon capture plants before that date. More action is needed, and quickly, to achieve these numbers; only 17 large-scale carbon capture plants exist in the world today, capturing roughly 40 million metric tons of carbon dioxide each year, a scant 0.1 percent of total global emissions.

In and out

The IEA recently noted that carbon emissions from advanced economies rose for the first time in five years in 2018. Given the economic challenge of substantially reducing fossil fuel use in electricity generation and industrial processes, carbon capture appears to be a practical, immediate solution.

Carbon capture and storage consists of three main parts: capturing, transporting and storing the CO2, the latter either underground in depleted oil and gas fields or in deep saline aquifer formations. The first leg of this journey entails separating CO2 from the other gases produced in industrial processes and electricity generation. The CO2 can then be transported to safe storage via pipeline, road tanker or ship.

The Petra Nova Project is the world’s largest carbon capture project at a coal power plant and is located just outside of Houston. The plant can capture about 1.4 million metric tons of CO2 each year.

In 2017, Mitsubishi Heavy Industries (MHI) Group, a carbon capture pioneer, along with its consortium partner, TIC, completed construction of Petra Nova’s post-combustion carbon capture and compression system, which captures more than 90 percent of the CO2 from a flue gas stream.

To provide a revenue stream for carbon capture, the CO2 is compressed, transported and pumped underground into an oil formation to increase overall oil production.

Just one of many

Carbon capture alone will not curtail the progressive warming of the planet, but it is a step that can be taken now — free from political wrangling. In recognition of the technology’s value, the U.S. Congress introduced bipartisan legislation in early 2018 to provide tax credits to companies that capture or reuse their CO2. President Trump signed the legislation into law.

Known as the 45Q tax credit, it provides carbon-producing companies a credit of up to $50 per ton over a 12-year period after the start of operation, depending on how the CO2 is used.

Even Congress could appreciate that a financial incentive was needed for industry to rapidly scale up carbon capture technology. Now the onus is on companies and the government to continue to find ways to realize more carbon capture projects.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

Nimble Online Banks Go After Brick-and-Mortar Behemoths

By Russ Banham

Dell Perspectives

Legacy United States brick and mortar banks are in the crosshairs of so-called challenger banks—nimble European startups with unusual names like Starling, Revolut, Monzo, and N26, and equally unusual value propositions. The digital-only banks have attracted millions of customers across Europe, carving inroads into traditional financial institutions’ depositor base.

Each challenger bank has developed a mobile application designed to make banking a speedier, frictionless and more enjoyable customer experience. All are said to be mulling U.S. expansion, with N26 and Revolut filling out the necessary paperwork to obtain both federal and state banking charters later this year.

Venture capitalists have taken notice, investing four times as much money into challenger banks in 2018 as they did in 2017 (and 10 times more than in 2015), according to CB Insights’ Managing Analyst Matthew Wong. Traditional legacy banks also are investors, with the venture capital arms of Citigroup, Goldman Sachs, and J.P. Morgan Chase placing bets on FinTech banking startups Square, Circle Internet, and Prosper, among others.

At the same time, another group of startups called NeoBanks are partnering with legacy institutions to offer similarly novel, digital-only (branchless) bank services, among them Cogni, Chime, Varo Money, and Aspiration. Added up, this whirlwind activity is expected to reshape banking into more of a mobile customer experience. Already, more than 9,000 bank branches have closed since 2010, primarily in big metropolitan areas.

More brick-and-mortar banks await the wrecking ball: Wells Fargo, for instance, plans to close 800 branches by next year. The upshot is clear: People have no time to wait in line at a retail bank branch to make a deposit or a withdrawal. In line has been superseded by online. “At the end of the day, this is all about people—their needs, time, and ease,” said Archie Ravishankar, CEO and co-founder of Cogni (short for “cognitive” banking).

From the Ashes of the Financial Crisis

Traditional banks certainly could have seen the onrush in competition coming. The financial crisis in 2008 and the Great Recession that followed resulted in a massive loss of consumer confidence and trust. But consumer anger and anxiety are not the only reasons for the surge in customers opting for alternative banks. Legacy bank infrastructures and antiquated value propositions are other factors.

Although many banks have sizably increased their IT budgets, their reputation for innovation is poor. “Most of us have a ‘love-hate’ relationship with traditional banking,” said Ravishankar. “We need to manage our money; we just hate doing it. … People’s lifestyles have evolved to where they expect personalized experiences.”

Who are these upstart challengers? Here are a handful that have opened for business outside the U.S. and their respective value propositions:

  • Monzo, a digital-only bank that tallies more than one million customers outside the U.S., offers consumers a no-fee, pre-paid mobile Mastercard debit card to manage their savings and spend. Through a partnership, Monzo provides 1 percent interest on money allocated to what it calls “savings pots.”
  • N26 (its name derives from the 26 cubes in a Rubik’s Cube) is another fully-digital mobile bank offering standard savings and checking accounts through the use of an app and a Mastercard for ATM cash withdrawals, albeit free of charge. It takes less than four minutes to open an account, compared to 30 minutes or more at a retail bank. N26 also counts more than one million customers outside the U.S.
  • Starling Bank, another digital-only mobile bank, offers an app for digital bank accounts and online Mastercard debit card, through which users can deposit cash at more than 11,500 post offices across the United Kingdom. The bank’s app connects with Apple Pay, Google Pay, Fitbit Pay, and other digital wallets.
  • While the above banks have obtained bank charters in the European Union, Revolut opted for a different approach, obtaining an e-money license instead. An e-license is quicker to obtain than a federal charter in the E.U. This digital alternative to cash allows users to make cashless payments with money stored in a digital debit card. Like the other challenger banks, Revolut has no hidden costs, like checking account fees (all the challengers pride their transparency). It also allows users to send money through social networks and a multi-currency Mastercard in a mobile app.

A Rewarding Alternative

The above digital banks are going at it alone in competing against traditional banks. Cogni is among the digital-only mobile bank startups collectively lumped together as NeoBanks. Unlike challenger banks that are independent FinTech companies, NeoBanks partner with a traditional financial institution, obviating the frustrations inherent in acquiring a federal and state banking charter.

This approach makes abundant sense, given the protracted process of applying for and receiving a charter. A dozen years have passed since the Federal Deposit Insurance Corporation (FDIC) last issued a new banking license. A key obstacle has been the Community Reinvestment Act’s requirement for U.S. banks to have branches. In 2018, the Office of the Comptroller of the Currency (OCC) for the first time started accepting applications for national bank charters from non-depository FinTech companies engaged in the business of banking.

Cogni, which is owned in part by FDIC-insured Barclays Plc, has been testing its MyCogni app in the U.S. since September 2018, in advance of a projected launch in June of this year. The NeoBank has a very unique value proposition that includes both rewards programs and a digital debit card providing up to 12 percent cash back on purchases at more than 150,000 retailers. Both concepts are aimed at banks’ paltry 1-2 percent interest rates.

One Cogni rewards program effectively gives depositors money toward achieving dream goals, such as a trip to Venice or to the Coachella music festival. Partnering businesses that would benefit from the depositor’s presence at these events—like hotels, restaurants, and assorted merchandisers—donate cash gifts to the account holders’ “savings buckets” to reach the person’s monetary need, say $5,000 for Venice and $500 for Coachella. “Banks should have an emotional relationship with their customers, driven by their lifestyles and life goals,” Ravishankar said.

He’s far from alone in this view. As Monzo’s website states, banks should be focused on “solving problems, rather than selling financial products.”

No More Sticking the Cash Under the Mattress

Obviously, these innovative bank alternatives put the onus on legacy institutions to shape up. As Deloitte’s 2018 Banking Outlook sees things, “Banks face a number of choices: replicate what FinTechs are doing, respond with equally innovative solutions, become more symbiotic and less competitive, or pursue a mix of these strategies that fit their unique capabilities and market positions.”

Challenger banks will undoubtedly take a share of the traditional bank market in the U.S. But as legacy banks learn from the upstarts, partner with other startups, and parlay their enormous capital bases into their own innovative consumer-focused platforms, the resulting free-for-all in competition should benefit all of us with a few dollars to save and spend.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

The Art of the Acquisition


By Russ Banham

Leader’s Edge

Mergers and acquisitions in the property-casualty and life and health insurance sectors broke new ground in 2018—and not just in the skyrocketing value of deals. M&A deal value among both P&C and L&H insurers—$40.3 billion—more than doubled in 2018 compared with the prior year, although the number of deals (533 in all) declined by 13%, according to audit firm PwC.

Many transactions were based in part on dealmakers’ atypical interest in transforming their organization’s business and operating models, addressing technology (in the P&C sector) and more innovative customer service (in the L&H sector).

In a KPMG survey of 115 insurer CEOs, nearly 37% said they were looking to transform their business models through acquisitions, while 24% said they were looking to transform their operating models through acquisitions.

Other atypical M&A factors included deals to diversify topline income. (Diversification into traditional property-casualty markets has long been a driver of M&A.) Several acquisitions in the P&C sector, for example, involved target companies with reinsurance operations, third-party claims administration, program business and insurance-linked securities (ILS) operations. “Every insurer is looking for ways to grow the top line, which isn’t easy,” says John Andre, a managing director at insurer ratings agency A.M. Best. “What’s interesting is how they’re going about it.”

Pressure to Change

In “going about it,” insurers have no trouble digging deeply into their plentiful capital coffers. Tracy Dolin, director and insurance sector lead analyst at S&P Global Ratings, cites an S&P survey saying industry surplus reached $790.7 billion on Sept. 30, 2018, up from $726.7 billion one year earlier. Net income also climbed to $50.7 billion, compared to $23.6 billion during the same period in 2017.

Overcapitalization comes with a price. “When you have too much money in the system, it ends up artificially depressing prices, commoditizing certain products and creating a need to compete differently,” says Mark Purowitz, leader of Deloitte’s insurance M&A and insurtech advisory teams. “Companies in both the property-casualty and life and health sectors are struggling with growth and pressured into figuring out how best to use their money.”

It seems they are diverting less of it toward stock buybacks, which fell from $11.7 billion in the first nine months of 2017 to $4.8 billion in the same period last year, according to S&P Global Ratings. “As capital for the sector keeps climbing and reaching record highs,” Dolin says, “there may be more compelling ways to deploy this capital that adds more value than just sitting on it or buying back shares.”

At the same time, organic growth has been limited in the industry, particularly among more mature insurance companies, says Ram Menon, a partner and global head of KPMG’s insurance deal advisory organization. Since the beginning of this decade, global GDP has increased by more than 20%, Menon says, while global premium volume has risen by a meager 9%.

The industry is also challenged by new competitors like reinsurers and investors in insurance-linked securities, in addition to market disruptions from emerging technologies. “Maintaining the status quo in such an environment is not a solution for sustainable growth,” Menon concedes. “Many insurers have come to realize that the traditional strategy of doing more of the same is simply not the best strategy. Many of the M&A deals we’ve seen indicate insurers are looking for deals that help transform their business and operating models. One way to do that is to gain access to other companies’ innovation initiatives and emerging technologies.”

Reaching New Markets

In all industries, M&A transactions can provide ample front-office and back-office benefits—reducing operating expenses, eliminating redundancies and increasing revenues. The thinking is that the combined organization will be greater than the sum of the individual parts, although these hoped-for synergies often look better on paper than in reality.

“History shows that synergies are often difficult to achieve,” Dolin says. “In our research, we have only identified synergies as a proven strength to an announced deal 5% of the time since 2000. Quite often the goalposts move or are forgotten in the years after the deals are done.”

While insurers certainly gave high regard to perceived synergies in their 2018 deal making, many acquisitions also departed from more traditional aims. Markel acquired Nephila, an ILS manager that generates fee-based revenue through its management of more than $12 billion in insurance risk-bearing capital from 300 geographically diverse investors. “Platforms with ILS capabilities are attracting M&A attention, which may increase in the future,” Dolin says.

A decade ago, the ILS market was a novel way for carriers to cede risks to third-party investors. This is no longer the case; the market has cemented its role as an additional source of risk-bearing capital. “We’re not even calling ILS ‘alternative capital’ anymore, because we believe it’s here to stay,” Dolin says. “Certainly, this is a factor in reinsurance consolidation and may reduce the number of independent reinsurers standing down the road.”

AIG’s $5.5 billion acquisition of Validus, a Bermuda reinsurer and specialist insurer, also reflects interest in new revenue opportunities. Validus further diversifies AIG business to include a reinsurance platform and an ILS asset manager (AlphaCat).

Even giant M&A transactions like French insurer AXA’s $15.3 billion acquisition of commercial lines insurer and reinsurer XL Catlin (forming new carrier AXA XL) had elements of this trend. While the acquisition complements and diversifies AXA’s existing commercial lines insurance portfolio, it also delivers reinsurance capabilities and access to alternative capital. “The acquisition of XL rebalances AXA’s portfolio,” Purowitz says, “but it also gets them into new businesses, giving them a greater spread of risk and access to revenue through a different customer base.”

Reaching the Customer

Another way some insurers are trying to grow the top line is by gaining access and to new distribution markets and getting closer to the customer. The Hartford’s $1.45 billion acquisition of Aetna’s U.S.-based group benefits business (short-term disability, long-term disability, group life, and lead management) was driven by traditional M&A factors, such as larger market share, although the deal also involves an innovative distribution strategy. “The acquisition makes us bigger and stronger, significantly increasing our market presence,” says Mike Concannon, head of group benefits at The Hartford. “But the transaction also provided a new way to expand our distribution, selling group benefits through Aetna’s medical products sales team.”

On the life and health side of the industry, the bigger financial transactions were primarily in the health sector, where transformative objectives were similar to those seen in the property-casualty industry.

Cigna’s $67 billion acquisition of Express Scripts, for example, gives Cigna the opportunity to offer a more integrated package of benefits to its customers. Likewise, pharmacy chain CVS Health’s $69 billion acquisition of Aetna’s insurance business creates a new type of healthcare entity expected to have greater appeal to consumers. Goals include simplifying how consumers access care by making it local, accessible and less costly.

“Everyone is looking for the silver bullet,” says Deep Banerjee, S&P Global Ratings’ director and lead life and health insurance analyst. “In this quest, we’re seeing all sorts of post-transaction combinations of traditional and non-traditional players. The mindset in these deals is to better assist the needs of consumers through novel concepts like onsite doctors or nurses in a retail environment.”

Activity in the life sector, while fairly substantial, followed more traditional M&A aims, such as a focus on core competencies or building market share. Liberty Mutual’s two-part sale of Liberty Life Assurance to Lincoln National and Protective Associates for nearly $5 billion in capital and other financial components was one of the sector’s largest deals of 2018. (Lincoln Financial cited the development of a more powerful group benefits operation as a primary factor in the acquisition.) Other major transactions included the acquisition of National Teachers Associates Life Insurance by Horace Mann Educators and Resolution Life’s agreement to acquire the life insurance arm of Australia’s AMP Ltd.

Tech Targets

The desire to harness the potential of emerging technologies like robotics, machine learning and predictive data analytics is also showing up as an M&A trend. (See sidebar: “Eyes on the Upstarts.”) “More than 60% of insurers now see disruption as an opportunity for growth rather than a threat,” Menon says, “with more than seven in 10 looking to M&A to help transform their organization in some way.”

All businesses and consumers nowadays expect efficient, fast and frictionless transactions. People don’t have the time or inclination to read and understand a booklet-thick insurance policy. They just want to know the basics from their broker or agent and trust in the product’s financial security. If insurers don’t satisfy these expectations, the fear is that some other entity—such as a big-tech company—will. “To bolster their competitive positions,” Dolin says, “we’re seeing carriers making technology-targeted bets in their M&A decisions.”

She points to the AXA XL Catlin deal and the addition of XL Catlin’s data analytics organization, led by chief data officer Henna Karna, to the AXA team. “Getting that data analytics team may have been a deal sweetener,” Dolin says. “It’s often cheaper to poach a top team than build one up from scratch.”

KPMG’s survey affirms this opinion, noting that one in 10 insurer CEOs are looking to acquire “new innovation capabilities” and “emerging technologies” via their M&A transactions. The Hartford’s acquisition of Aetna’s U.S.-based group benefits business fits this paradigm. “The deal gave us access to Aetna’s strong digital capabilities, helping to accelerate our technology strategy while reducing the costs we had anticipated were needed to upgrade our legacy systems,” Concannon says.

Technology is now another “key area of focus” for insurers in their M&A decision making,” Concannon says, and one that is “quickly becoming a competitive differentiator.”

“It’s an arms race out there,” he says. “All insurers are looking for ways to serve their customers with products closer to their needs at less cost. Technology is a way for us to process our transactions more efficiently, at less cost, with higher quality, and less friction for customers. Basically, you have three choices—you build it, rent it or buy it.”

Purowitz agreed the hunt is on among carriers to upgrade their legacy systems—and fast. “Few carriers are holistically using advanced technologies,” he says. “I’ve honestly encountered only a small handful on the front side using these tools to reach the marketplace and on the back side to reach into the plumbing. In today’s competitive environment, timing is essential.”

Nevertheless, Purowitz cautions insurers to be careful when considering technology assets in their M&A deal making. “Too many carriers rush into a deal without fundamentally knowing the problems they’re looking to solve with technology,” he says. “They’re pressured by FOMO”—the fear of missing out—“into feeling they have to do something. Their boards see competitors doing it, and that ratchets up the stress.”

He advises insurers to do “far more R&D” before acquiring a company for its technology capabilities. “The challenge is that the industry historically has not done this type of R&D all that well,” Purowitz says.

The Import for Brokers

As insurers combine in atypical ways to transform their business and operating models, brokers must prepare for the new competitive landscape that emerges. For the most part, observers are sanguine that brokers will continue to play important intermediary and consultative roles.

“The theory is that all these new technologies will disintermediate the middleman,” Menon says, “but the fact remains that the industry structurally has been built around insurance brokers for centuries. Newer generations may want to access insurance directly, but most of us will still prefer to deal with a broker or agent. And it’s not like brokers aren’t innovating. Many of the larger ones in particular are developing very innovative ecosystems to connect their clients with themselves and different carriers.”

Michael Brosnan, a partner and insurance transactions leader at Ernst & Young, has a similar view. “Some commodity stuff may fall off the edges for the brokers, but there will still be a need for the expertise they provide in different classes and for particular products needed in different industry sectors,” he says.

While Dolin agrees the likelihood of broker disintermediation is small at the moment, she is less sure how the different pieces of the insurance business will fit together in the future. “Generally speaking, every participant in the insurance value chain is dipping into each other’s territory, as we’ve seen in the recent M&A activity,” she says. “They’re all trying to protect their competitive position and value proposition, driving them into the offerings of others.”

“Where this will lead will be very interesting,” she acknowledges, “but it’s still too early to tell.”

Russ Banham is a Pulitzer-nominated financial journalist and author.

Fix It Before It Breaks: How Smart Machines Are the New Quality Control

By Russ Banham

Dell Perspectives

It wasn’t long ago when “quality control” consisted of expert personnel whose task was to measure, weigh, touch, and scrutinize finished goods to discern evidence of possible defects. While many manufacturers still rely on such expertise, more are turning to automated “smart machines” in the Industrial Internet of Things (IIoT) for these appraisals.

Machine intelligence is essential for success in the digital future. According to a 2017 study by management consultancy Bain, the IIoT market will generate approximately $85 billion annually by 2020. To remain competitive in today’s rapidly-changing business environment, manufacturers must digitally transform how they make and distribute products.

A 2017 report by Deloitte affirms this view. “The concept of adopting and implementing a smart factory solution can feel complicated, even insurmountable,” the report stated. “However, rapid technology changes and trends have made the shift toward a more flexible, adaptive production system almost an imperative for manufacturers who wish to either remain competitive or disrupt their competition.”

A smart machine in a manufacturing context is a piece of factory equipment embedded with IoT sensors that calibrate and communicate performance issues over the internet to manufacturing control rooms and even other machines to drive faster and smarter decisions. The benefits include instant alerts of a machine that is wearing down and in need of maintenance or repair; self-correcting machine adjustments to address variations in tolerance; and real-time insight into a manufacturing slowdown at a major supplier to rapidly shift production to other suppliers.

“The primary value of smart machines is their ability to produce products of the highest quality,” said Dean Bartles, president of the National Tooling and Machine Association, a trade group representing the precision manufacturing industry. “The sensors inside the machines basically do what seasoned quality professionals have long done, only much, much better.”

High product quality is good news for a manufacturer’s top and bottom lines, as it results in more satisfied customers and fewer defects and production scrap (leftover materials that add to costs). “With smart sensors measuring vibration, temperatures, moisture and dimensions, you’re able to tell pretty quickly when something is off,” said Bartles, an industrial engineer and former vice president and general manager at three General Dynamics manufacturing plants.

“The machine itself tracks the `drift’ in the tooling as it occurs,” he explained. “Some smart machines can even intervene on their own to bring the ideal configurations back into line—self-correcting without the need for human intervention.”

Intelligent Factories

Self-correction capability, for example, could be found in an injection-molding machine, in which specific molten materials like metals and plastics are injected into a mold for use in fabricating a part or finished good, everything from surgical devices and electrical circuit boards to more prosaic toys and automotive intake manifolds. Once the mold is made, products are produced on a constant, uninterrupted basis. However, the process isn’t perfect; defects like blistering, cavities, and contamination by foreign materials are common problems.

By embedding visual, temperature, and weight sensors into the molding machine, imperfections can be identified as soon as they become evident. If the defect is determined to be the presence of cavities—caused by an inadequate volume of metals or plastics being pumped into the mold—the data analytics will direct a computer inside the machine to increase the volume to the correct level.

Companies like Marvin Windows and Doors are at the outset of developing tomorrow’s smart factories today. At a company plant in Oregon that manufactures different-sized wood pieces, Marvin has installed computer numerically controlled (CNC) machines that use laser sensors to give operators an inside look at a board’s knot and grain structure before cutting it into smaller pieces of wood. The sensors help ensure maximum yield, in this case, the largest piece of wood possible from a single block of lumber.

“The sensor inputs data into a computer inside the machine that analyzes the visual image,” said Jim Macaulay, CFO of Marvin Windows and Doors. “Based on this information, the machine knows the optimal cut to make, increasing production yield with less human intervention.” Previously, Marvin had relied on the eyes and experience of shop foremen to identify possible defects.

Internet-connected sensors have also been embedded inside other factory equipment at Marvin plants to measure temperature, vibration, moisture, and other conditions, Macaulay noted. If a motor inside a machine exceeds a specific temperature threshold, this information travels over the internet to a central location for corrective actions. By connecting the factory equipment together in what is known as the Industrial Internet of Things (IIoT), a problem can be self-corrected—one machine picking up a troubled machine’s production tasks. “As a result, we’re able to reduce the chance that one machine’s failure will result in a production stoppage,” said Macaulay.

Precision Is Paramount

Other manufacturers are beginning to seize similar value. “By using sensors to measure and report on diverse conditions, and then collecting all this information in one place for analysis using algorithms, manufacturers are able to draw rapid conclusions on remedial actions,” said Alex Reed, cofounder and CEO of Fluence Analytics, a manufacturer of industrial monitoring solutions that produce continuous data streams.

The algorithms ferret out correlations and non-correlations in the diverse data produced by different sensors, indicating machine wear and product quality issues well before they result in batch failures. While many smart machines can self-correct a problem, more complex manufacturing processes still require human beings to intervene.

“It’s not as straightforward as it often is portrayed to be, though we are definitely headed in a direction where the use of AI [artificial intelligence] and machine learning will direct a correction in a machine based on the findings of the analytics,” Reed said.

Both he and Bartles are members of the Smart Manufacturing Leadership Coalition (SMLC), a nonprofit group comprised of major companies like Rockwell, General Motors, and Owens Corning that works to develop the world’s first smart manufacturing open technology platform. The hope is that midsize and smaller manufacturers can use the open source platform in developing their IIoT strategies.

Abetting these aims is the increasing sophistication of sensors at lower price points. “In our work, we use spectroscopic, infrared and optical sensors to determine viscosity at the molecular level,” said Reed. “For example, we’re able to discern the composition of a material like a polymer. If the composition is off even a little, it can result in [product] failure, waste, and production downtimes. Nowadays, virtually everything in the supply chain begins with sensors.”

Bartles shares this opinion: “Sensors are the modern equivalent of a `red flag,’ giving you insights into possible manufacturing hiccups so your supply chain doesn’t fall behind schedule. More and more OEMs [original equipment manufacturers] are receiving sensor-produced data over the internet from their key suppliers’ machines. This information is extremely insightful for decision-making purposes.”

He recalled how this remarkable capability contrasts sharply with his earlier career at General Dynamics. “Like other manufacturers, we’d receive daily status updates from our suppliers on part counts. But suppliers sometimes don’t tell you the truth,” Bartles said. “Ideally, you want real-time accurate information. This way you know if you need to turn the knob off on one supplier that’s having trouble [in order] to turn the knob on at another supplier.”

Smart machines also offer a more advanced way to trace and track the product quality of all suppliers linked in the supply chain, ensuring each component of a finished product’s specifications has been validated for quality specifications, from the raw material through varied production stages to customer delivery.

No Turning Back Now

Given these myriad benefits and the wider profit margins that can accrue, the production experts anticipate growing demand by manufacturers of all sizes for smart machines down the line.

“We’re not yet at the point where this is widely adopted and delivering massive value; in many manufacturing environments, work still needs to be done by quality control experts,” said Reed. “However, these individuals tend to hail from older generations and are soon to leave the workforce; this puts the onus on companies to invest in the IIoT sooner rather than later. There’s no question that manufacturing is migrating from qualitative assessments by people to quantitative assessments by machines.”

Like everything in business, early movers and their fast followers generally have a leg up on competitors. While smart factories may seem like a fantasy torn from a Buck Rogers novella, they’re how most things will be made now and into the future.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

How Blockchain Is Disrupting 3 Industries

By Russ Banham


Blockchain burst into the mainstream five years ago as a secure platform for Bitcoin transactions, but the technology’s use today is extending well beyond cryptocurrency to transform industry sectors on a holistic ecosystem basis.

Healthcare, banking and insurance are just three industries that anticipate tens of billions of dollars in cost savings from the blockchain’s permanent decentralized ledger. As a result of blockchain, banks, for example, expect to generate more than $27 billion in cross-border settlements alone by 2030, according to a 2018 study.

At its most basic, a blockchain is a distributed, digital ledger with built-in security that records transactions among the network participants in real-time. Every 10 minutes, these transactions are verified, permanently time-stamped and stored in a block that is encrypted and inextricably linked to the preceding block — creating a blockchain.

Participants don’t need to trust that the ledger has not been tampered with because entries are trackable and irrevocable. Another advantage of blockchain technology is business efficiency. Participants can execute smart contracts without a central controlling authority. The contracts trigger when pre-arranged terms and conditions are met.

These benefits and others — like data quality and transparency — have made blockchain the go-to technology for digital transformation, explains David Uhryniak, blockchain competency leader at the accounting, consulting and technology firm Crowe. “Blockchain is the underlying technology that fosters the required trust to enable companies and entire industries to transform around data and successfully implement other transformative technologies like artificial intelligence (AI) and the Internet of Things (IoT),” he says. It’s already disrupting multiple industries in tangible ways.

In the property-casualty insurance industry, real progress is being made to create ecosystems that speed up the automobile insurance claims process — and the potential payout is huge.

Take, for example, the Institutes RiskBlock Alliance, a collaborative experiment in which dozens of insurance companies plan to share specified automobile policyholder data in a blockchain network. Other participants with access to the secure environment include third parties like car repair shops, tow truck companies, state motor vehicle departments and law enforcement agencies.

This type of ecosystem would streamline tedious and costly processes. Consider the following scenario: After a minor two-car collision, sensors in the vehicles would send alerts to the blockchain network, triggering pre-arranged smart contracts among the parties to dispatch tow trucks, which would take the cars to designated repair shops. At the same time, other sensors measuring the speed and braking of both vehicles, as well as data on weather and road conditions, could send this information to the blockchain, whereupon it would be instantly determined which party is likely at fault.

All that data is a goldmine from an analysis standpoint. “A smart contract between the two insurers of the vehicles may eliminate the need for a claims adjuster to go to the scene of the accident,” says Uhryniak. “The claims process would automatically spring into motion, possibly with the claim being filed and paid that day or the next one.”

That’s just one industry. Uhryniak cites four key benefits of blockchain that have transformational potential across business sectors — enhanced transparency, revenue, efficiency and engagement. “There’s friction within every process related to the various interactions with counterparties, customers, regulators and even the gathering of data,” says Uhryniak. These inefficiencies are costly, he explains, but blockchain networks obviate these challenges.

A case in point is the healthcare sector, an industry that Uhryniak projects will be a vastly different enterprise in the next five to 10 years. Today, payers like health insurers each have specific contract terms and conditions that must be met in order for a procedure or treatment to be deemed medically necessary and, therefore, covered by the insurer’s health plan. These terms and conditions could be turned into smart contracts and added to blockchains, eliminating the inefficiencies involved in verifying permissible insurance coverages, Uhryniak says.

Another benefit of this transparency in healthcare is streamlined and reliable billing. “Blockchain helps ensure a patient isn’t charged for the same medical procedure by two different physicians or hospitals,” Uhryniak says. “The technology verifies the accuracy of each transaction, which becomes a permanent, immutable record.

Health insurers benefit in other ways. For instance, an insurer can verify the necessity of medical treatments prior to execution and re-validate that they were in fact performed. Blockchain also addresses the problem of rising insurance claim denials. According to a 2017 analysis by Crowe of more than 300 hospitals, 9.6 percent of all medical insurance claims are denied. Used as a billing tool, blockchain could instantly ferret out whether or not an insurer’s claim matches its specified contract terms and conditions, reducing delays and human error.

Banks are also poised for blockchain-enabled transformation. Only 3 percent of bank executives surveyed by Crowe expect “minimal change” from blockchain technology in the next 10 years, with the remaining 97 percent anticipating modest to significant change. In addition to streamlining the mortgage approval and closing processes, blockchain technology proposes similar process enhancements in the disbursement of funds for commercial loans and syndicated loans, Uhryniak says.

As businesses initiate blockchain strategies, Uhryniak advises that they pursue a measured approach that begins with an evaluation of how the technology will provide a competitive advantage. Firms like Crowe can help with this assessment by guiding companies to identify the right blockchain platform for their needs and in some cases may be able to build this infrastructure as a “proof of concept” prior to implementation.

For companies, adapting to the confluence of technologies involved in tomorrow’s ecosystems requires thoughtful consideration — and, in many cases, raises concerns about risk. As the volume of IoT devices proliferates to reach 125 billion worldwide in 2030, and remarkable tools like machine learning become smarter through exponentially expanding computing power, only blockchain at the moment presents a system of trust in data. It’s no wonder so many industries have taken notice.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

Hiring America’s Heroes

By Russ Banham

Chief Executive

America’s military veterans are some of the most skilled people on the planet, able to lead a project team through extraordinary challenges or deliver superior outcomes on mission-driven tasks. More than one million veterans will exit the U.S. Armed Forces over the next five years. This diverse talent pool has highly sought-after competencies, including discipline, flexibility, planning, technical, communications and problem-solving skills. And that’s the short list.

Yet, more than one million U.S. veterans remain unemployed, somehow slipping through the recruitment net. Research suggests companies struggle to access this talent pool, despite recognition of its potential. In a recent study by Chief Executive and the State of Indiana of nearly 300 U.S.-based CEOs, 57 percent reported that their company considered hiring veterans, yet only 17 percent had implemented a program to support those efforts.

The good news? A growing number of U.S. companies are creating initiatives to more closely align military training experiences with employment openings and business needs. And the efforts are paying off. “Veterans are disciplined and accountable; they take ownership of their work, are very proactive in finding solutions to varied challenges, and don’t make excuses,” says Larry Hughes, vice president of training and diversity at 7-Eleven and a former Army officer who commanded two company units as a field artillery officer during his five-year service. “They also have advanced technical training and strong cross-cultural experiences. And they’re team builders who know how to resolve conflicts, motivate people and get the best out of them.”

On the pages that follow, we share some practical tips from companies and CEOs making a difference in the lives of veterans—while also making the most of a great opportunity.

Getting Started

Kevin Ryan founded the Service Brewing Company, a small brewery with a taproom in Savanna, Georgia, in 2014. Of the company’s 24 investors, 20 are veterans; and the majority of its 13 employees are also veterans. One is currently deployed in the National Guard and another is a former military spouse. “We’re always looking for veterans to add to our team,” says Ryan, a 1996 West Point graduate who subsequently served as an Army infantry officer.

In recruiting, Ryan aligned with two local military bases (Ft. Stewart and Hunter AAF) and Georgia Tech’s Veteran Education Program. He also reaches out to student veterans at Georgia Southern, as well as at the Association of the U.S. Army, the Military Officers Association of America, the Mighty Eighth Air Force Museum and many other organizations. “Soldiers don’t often get to go to job fairs or have the ability to network successfully, so we need to get out in front of them,” he says.

Other companies employ a similar strategy. At 7-Eleven, field personnel nurture close relationships with military base transition office staff members. “We advise on-base soldiers on resumé building and job interview tactics, host entrepreneurial boot camps and invite exiting service members to attend our seminars on franchising opportunities,” says Hughes. “We’re also a regular presence at military hiring fairs.”

The company has hired more than 300 veterans and military spouses as field consultants in the past year, tripling the number of these hires since 2014. The position is a gateway to other jobs in the organization.

Companies interested in hiring military veterans and spouses can draw on a wealth of resources geared toward assisting veterans. Local Veteran Service Organizations, Student Veterans of America chapters at colleges and universities and web sites like Hero 2 Hired, Veterans Job Bank or are all great ways of proactively recruiting ex-military men and women. Companies can also seek out career fairs focused on veteran recruitment and programs like Google’s “Jobs for Veterans” initiative.

Once hired, veterans and military spouses are given the special treatment they need and deserve to make the best of their talents. La Quintawelcomes military hires with a special veteran or military spouse pin for them to wear on their uniforms or business attire. Through the hotel’s guest loyalty program, five million points were donated to several veteran-focused organizations like Operation Homefront and Armed Services YMCA. “Putting people first is embedded in our culture, and those who have a passion for people and service fall in line with these core values,” says Derek Blake, La Quinta vice president of marketing and military programs.

Starbucks provides veterans with a unique benefit—to gift their Starbucks College Achievement Plan to a child or spouse. The program funds tuition for an online bachelor’s degree at Arizona State University in 150 various degree programs. Starbucks also offers veteran-employees what are called Military Mondays, a program developed with the William and Mary Law School to provide free legal counseling to service members at its stores. “Military Mondays is now scaling nationally and growing to include other critical services such as financial literacy training and investment counseling,” says Christopher Miller, Starbucks veterans and military affairs manager.

 Citi, in partnership with Bring Them Homes, has been instrumental in providing transitional, supportive, temporary, and permanent housing for veterans and their families. “To date, the program has supported the creation of more than 3,500 affordable housing units,” says Ruth Christopherson, a Citi senior vice president and retired colonel, U.S. Air National Guard.

Matching Skills

7-Eleven, which joined other U.S. companies in a 2012 pledge to hire one million veterans by 2020, is well on its way toward achieving the goal. The company has hired more than 300 veterans and military spouses in the past four years alone. To align the resumes of veterans with needed business skill sets, the company has created a presentation called “Military 101” that translates military assignments into corresponding business tasks.

“It ensures our recruiting team has a firm understanding of how military experiences and skill sets translate into roles within our team, and enables our transitioning veterans to be set up for success,” says Dave Strachan, chief of staff and a former Army officer. 7-Eleven CEO Joseph DePinto also is a former Army field artillery officer and West Point graduate.

Other companies tout the extraordinary range of abilities that soldiers attain over their own military careers. “People don’t think of veterans as having finance, operations, HR, IT or project management skills in a business context,” says retired U.S. Army Brigadier General Carol Eggert, a recipient of the Legion of Merit, a Bronze Star and a Purple Heart and head of Comcast NBCUniversal’s eight-person Military and Veteran Affairs organization (see sidebar). She says that misconception is fueled by a lack of understanding of the breadth and scope of leadership positions in the military.

Many companies are doing just that, creating an array of programs designed to match military community skill sets with business needs.For example, Citi, cofounder of the Veterans on Wall Street recruitment initiative and corporate sponsor of’s mobile app, launched Citi Salutes to centralize its 17 military veteran employee networks under the oversight of an executive steering committee. The firm also created a Veterans Recruiting Toolbox for recruiters.

Dow Chemical implemented a program where four or more years of military service meet the company’s minimum job requirements. The company also is running a pilot Military Engagement Program, in which a current employee-veteran coaches service members and military spouses through its hiring process.

Many companies, including 7-Eleven, Starbucks and Comcast, are corporate partners in the Hiring Our Heroes fellowship program. The 12-week operations management internship is designed to provide the skills needed to succeed in the civilian workforce. “We make an offer of employment to fellows who complete the program,” says Strachan, citing 7-Eleven’s recent hiring of a dozen graduates.

Smoothing Transitions

For many veterans, their first job in the private sector can be dislocating. The management structure is different, the vocabulary of business is arcane and the processes are atypical. Easing the transition of this talented group of employees improves the chances of retaining them. A 2016 survey by the U.S. Chamber of Commerce Foundation found that 44 percent of veterans left their first post-military job within a year.

Job vacancies at the Black Knight, a fast-growing company of 5,000 employees, are being filled with veterans at a 10 percent rate. For good reasons, too, since the company pledges full-wage continuation and medical and dental benefits to employees called up for active duty in the Reserves or National Guard. Returning employees are placed in the same position, or another position they might have attained had they remained continuously employed. “We’re ensuring their career paths remain productive and promising,” Circelli says. “You need to make hiring veterans a priority and then have the dedication to fulfill that commitment.”

At construction giant. Cushman and Wakefield, a military transition roadmap helops veterans acclimate to the corporate environment. Deloittesponsors the Career Opportunity Redefinition and Exploration Leadership Program, helping veterans and active duty service members identify their unique strengths to better direct their careers. Every Deloitte business has a partner, principal or managing director as a Champion for Military and Veterans. GE partnered with the U.S. Army Reserve Medical Command in a pioneering externship program providing eight months of biomed and imaging training to Army Reserve biomedical technicians.

Another Opportunity

According to research compiled by Blue Star Families (BSF), 43 percent of military spouses are unemployed, compared to 25.5 percent of civilian spouses. Eggert suggests employers shun this talent pool for outdated reasons. “Employers know they often need to relocate,” Eggert explains. “This makes no sense in an era where Millennials are job-hopping every three or four years.” Comcast not only proactively recruits military spouses, but also helps those forced to relocate find jobs elsewhere in the organization or with other employers through its partnerships with different veterans coalitions.

Booz Allen Hamilton welcomes military spouse employees with personal emails from other military spouses at the vice president level and has developed a specialized handbook for their use. And Starbucks is a member of the Defense Department’s Military Spouse Employment Partnership program, composed of more than 360 employers vetted and recognized by the Defense Department as portable career options.

Certainly, companies looking for skilled, hard-working and motivated employees would benefit from giving more thought and effort to hiring veterans and military spouses. “Every branch of service espouses specific core values like loyalty, dedication, respect and integrity,” says Eggert. “Military personnel live by these values, forging people with remarkable character, self-reliance, tenacity to get the job done and leadership.”

Service Brewing’s Kevin Ryan is certainly happy he’s hired so many vets. “One of the first things the military teaches you is to take orders—you’re given a task and you do it,” says Ryan. “Working in a brewery is a physically demanding job. You’re pulling and pushing and shoveling all day long, and then putting on your best face to pour a draft for a customer. I’ve never heard a single complaint.”

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

How Carbon Capture Tech Is Easing Industry’s Green Transition

By Russ Banham


Scientists on the UN’s Intergovernmental Panel on Climate Change (IPCC) commissioned by the United Nations to provide guidance to global leaders on the economic and humanitarian impacts of climate change reviewed more than 6,000 scientific studies before reaching a devastating conclusion: Greenhouse gases (above all carbon dioxide, or CO2) must be reduced by 45 percent by 2030, and 100 percent by 2050, to deter a 2.7-degree Fahrenheit increase (from pre-industrial levels) in global temperatures.

With nearly 200 countries on board, the Paris Agreement offers hope for reducing the production of greenhouse gases in the future. But more needs to be done today to avoid the dire fate the IPCC projects. As we work toward a decarbonized energy future, the widespread use of carbon capture technology will likely be an indispensable strategy in our toolkit.

Seize, store and sell

The potential of this technology to reduce greenhouse gas emissions is “considerable,” the IPCC states, estimating that carbon capture can trap up to 85 to 90 percent of the CO2 emissions produced from the use of fossil fuels in industrial processes and electricity generation, effectively preventing that CO2from entering the atmosphere.

The IPCC is not alone in its support for increasing use of this promising technology. In a 2016 report titled “20 Years of Carbon Capture and Storage,” the International Energy Agency (IEA) suggests that wide-scale use of carbon capture would result in a 19 percent reduction in global CO2 emissions by 2050. However, this projection assumes the creation of approximately 3,400 carbon capture plants before that date. More action is needed, and quickly, to achieve these numbers; only 17 large-scale carbon capture plants exist in the world today, capturing roughly 40 million metric tons of carbon dioxide each year, a scant 0.1 percent of total global emissions.

In and out

The IEA recently noted that carbon emissions from advanced economies rose for the first time in five years in 2018. Given the economic challenge of substantially reducing fossil fuel use in electricity generation and industrial processes, carbon capture appears to be a practical, immediate solution.

Carbon capture and storage consists of three main parts: capturing, transporting and storing the CO2, the latter either underground in depleted oil and gas fields or in deep saline aquifer formations. The first leg of this journey entails separating CO2 from the other gases produced in industrial processes and electricity generation. The CO2 can then be transported to safe storage via pipeline, road tanker or ship.

The Petra Nova Project is the world’s largest carbon capture project at a coal power plant and is located just outside of Houston. The plant can capture about 1.4 million metric tons of CO2 each year.

In 2017, Mitsubishi Heavy Industries (MHI) Group, a carbon capture pioneer, along with its consortium partner, TIC, completed construction of Petra Nova’s post-combustion carbon capture and compression system, which captures more than 90 percent of the CO2 from a flue gas stream.

To provide a revenue stream for carbon capture, the CO2 is compressed, transported and pumped underground into an oil formation to increase overall oil production.

Just one of many

Carbon capture alone will not curtail the progressive warming of the planet, but it is a step that can be taken now — free from political wrangling. In recognition of the technology’s value, the U.S. Congress introduced bipartisan legislation in early 2018 to provide tax credits to companies that capture or reuse their CO2. President Trump signed the legislation into law.

Known as the 45Q tax credit, it provides carbon-producing companies a credit of up to $50 per ton over a 12-year period after the start of operation, depending on how the CO2 is used.

Even Congress could appreciate that a financial incentive was needed for industry to rapidly scale up carbon capture technology. Now the onus is on companies and the government to continue to find ways to realize more carbon capture projects.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

Visions of Commercial Transportation: The Future of Commercial Auto Insurance Is Here

By Russ Banham

Carrier Management

For several years now, the commercial auto segment has been among the property/casualty insurance industry’s worst performing lines. Wounded by a sharp uptick in claims frequency and severity and helped little by inadequate premium increases, average direct loss ratios and combined ratio hover around 66 and 110, respectively.

The market’s distress is attributed to a variety of higher loss exposures, including increasingly distracted and fatigued truck drivers and the high cost of repairing vehicles embedded with expensive collision avoidance cameras, sensors and telematics devices. The good news is that these same technologies are expected to positively alter the status quo, positioning commercial auto for a market rebound within the next five to 10 years.

Transportation experts project that semi-autonomous and fully autonomous electric trucks using crash avoidance sensors, cameras, telematics and deep learning forms of artificial intelligence will guide the way toward unparalleled safety. While semi-autonomous trucks equipped with lane correction and automatic braking systems are already on the road, fully autonomous/driverless vehicles are being tested across the country and the world.

Over the next decade, these trucks will gradually make their way into the nation’s transportation network, initially for long-haul delivery of goods on highways. Tests currently are being conducted in so-called “platooning,” which involves a convoy of trucks lined up in a row on a dedicated highway lane set aside specifically for their use. Only the first truck in the queue is driven by a human being; the remainder use automated driver support systems to maintain a specific distance behind the leader, accelerating and braking as dictated.

Since highway accidents result in the most severe commercial auto insurance claims (due to a greater risk of multiple fatalities), a future in which autonomous trucks travel along a dedicated lane bodes well for commercial fleet operators, their insurers and the driving public at large. In 2017, truck-related fatalitiesreached their highest level in 29 years, up 9 percent to 4,761 deaths. (Source: “Trucking Fatalities Reach Highest Level in 29 Years,”, Oct. 4, 2018, reporting on the U.S. Department of Transportation’s National Highway Traffic Safety Administration analysis, “2017 Fatal Motor Vehicle Crashes: Overview,” page 3)

Accident frequency rates are a different matter. In our Amazon-fueled era of ecommerce, more trucks and delivery vans are congesting shorter-distance routes, particularly in the so-called “last mile” of transport.

“Accidents are increasing because of crowded roadways and streets, driver inexperience, and the rush to deliver goods in a certain time frame,” said Steve Viscelli, senior fellow at the University of Pennsylvania’s Kleinman Center for Energy Policy. “What used to be an experienced UPS driver delivering a package here and there is now 20 or 30 part-time people in vans delivering dozens of small packages in very short time frames.” He’s referring to Amazon Flex and Uber Freight Plus—applications that link drivers with shippers to deliver smaller packaged goods.

These drivers are subject to both traditional collisions and non-accident-related injuries. “There’s been an increase in basic ‘slips and falls’ from drivers bringing bulky packages into a residence,” Viscelli said. “Drivers also double park and fail to use proper techniques for removing heavy packages, hurting their backs. Of course, all that congestion and the need to make so many deliveries in a certain time frame also results in a greater number of collisions.”

Despite higher claims activity, technology is seen as an eventual enabler for safer practices, reducing both accident frequency and severity. Telematics drawing data from onboard cameras and other sensors will alert fleet safety managers in real time to road hazards, weather conditions, vehicle malfunctions, traffic congestion and optimal alternate routes.

As insurers and commercial fleets—large semi tractor-trailers, intermediate-sized trucks, and smaller pickups and vans—begin to share their respective data, expectations are for truly significant decreases in accident-related claims. “In five to 10 years, we will see a period of fast-maturing safety,” said Randy Mancini, vice president of commercial lines at regional insurer Penn National. “Beyond that we will see a transportation system that looks little like the one we’ve long known.”

Handing Off the Baton

This future is already beginning to materialize, evident in subtle changes in the intermodal delivery of raw materials and packaged goods. “Historically, the system has relied on rail, semi tractor-trailers, and smaller trucks and vans,” said Viscelli, author of the book, “The Big Rig: Trucking and the Decline of the American Dream.” “In the expanding ‘I want it now’ ecommerce environment of the future, rail will take on a larger role transporting goods from shipping ports to large warehouse-like depots alongside major highways.”

Fully autonomous trucks will then pick up these goods for transport over long distances in a dedicated highway lane to another depot, Viscelli added. “From there, a semi-autonomous, intermediate-sized truck will transport the stuff on shorter distances to an Amazon or other fulfillment center,” he said. “Smaller trucks and vans driven by for-hire drivers will then handle the last mile of delivery to homes and businesses, as they do now.”

This scenario, assuming it comes to fruition, will result in fewer accidents on highways. “If lawmakers and regulators set aside a designated lane exclusively for self-driving trucks, the chance of a passenger car cutting off a truck is vastly reduced—to the benefit of commercial fleets, drivers and insurers,” said Frank Palmer, senior expert in McKinsey & Company’s insurance practice.

Frank Netcoh, head of middle-market auto for The Hartford, shares this perspective. “If you have a fully autonomous truck on a big stretch of highway designated specifically for these vehicles, the platooning concept would reduce the possibility of making a mistake,” Netcoh said. “It’s hard to get into a collision when no ‘driver’ is screwing up.”

What about the safety of shorter-duration transport vehicles driven predominantly by people?

The experts are optimistic that safety enhancements warning drivers about impending hazards and correcting vehicles to reduce the risk of rear-end collisions, unsafe lane departures and rollovers (caused by the unequal distribution of weight inside a truck) will also increase safety and reduce accident frequency.

“These crash avoidance technologies are already in use today, but the real ‘game changer’ in my mind is telematics—the movement of information from onboard cameras and sensors to fleet safety managers,” said Brian Fielkow, CEO of JETCO Delivery, a logistics business that specializes in regional trucking, heavy haul and national freight.

Depending on the telematics device, a two-way camera films both driver behaviors and the road ahead. If a truck is in an accident, the data can indicate what the driver was doing just prior to the collision—such as reading a text, eating or drinking, or blankly looking ahead with shoulders slumping and eyelids shuttering from fatigue (the camera captures a driver’s body position, in addition to his or her face). This information can then be used for evidence-based training purposes. “It’s like watching game films—a learning tool,” said Fielkow. “Even the best driver isn’t a perfect driver.”

Front-looking cameras, on the other hand, can discern the different factors leading up to an accident or a near-miss. “A trigger event like a hard brake will inform the telematics to send video depicting the road scene a few seconds prior,” Fielkow explained.

In accidents in which a truck rear-ends a vehicle, the video can be the difference between a very expensive claim and no claim at all. “Traditional investigations of an accident almost always attribute the cause of the collision to the vehicle in the rear,” said Fielkow. “However, the video may indicate that the driver of the rear-ended vehicle was swerving in and out of traffic and actually cut off the truck, altering liability.”

“Regrettably, people who get into an accident with a truck see that big name sprawled across the side and tend to blame the company,” said Jennifer Haroon, Nauto chief operating officer and formerly head of business operations at Waymo (Google’s self-driving car project). “Our video evidence exonerates a lot of drivers.”

Gizmos and Gadgets

Telematics devices are becoming increasingly more sophisticated and less expensive, encouraging wider use by fleet operators. The visual sensors, for instance, are smaller, even though the semiconductors within them are more powerful. Sandeep Pandya, president of Netradyne, another maker of computer vision cameras, attributes the enhancements to ongoing technological advancements in smartphones.

“We’re in an age of powerful computing capabilities and ubiquitous connectivity via 4G broadband cellular technology,” he said. “Using deep learning, algorithms can automatically draw insights from visual images, accelerometers, gyroscopes and other sensors…Mass quantities of other data like the weather and road conditions also can be analyzed to guide safer driver behaviors.”

That’s uplifting for both truck fleets and their drivers, an employment category where demand far outstrips supply. The American Trucking Association estimatesthat the transportation industry needs to hire nearly 900,000 additional drivers to meet rising demand for service. Few young people want to drive a truck for a living. (The average age of truck drivers is 55, according to some sources; the ATA puts the average age of just over-the-road, for-hire drivers a little lower, at 49.)

“Professional truck drivers drive 50 hours a week and 150,000 miles per year on average; they take great pride in what they do,” said Pandya. “Almost the entirety of their work is uneventful, but it’s that 2 percent in which they confront hazardous conditions that define them. Following an accident, drivers feel vilified, making it hard for the industry to retain them. Telematics is a way to determine the best of the best for retention purposes.”

Netradyne’s cameras, he explained, will ferret out positive driving behaviors as well as negative ones. “You’re now able to know which drivers are the most safety conscious,” said Pandya. “This gives a truck company the opportunity to address its driver shortage problems; instead of spending $10,000 to recruit a new driver, it can put it toward a bonus rewarding its best drivers.”

Filming a truck driver’s entire time at the wheel creates privacy issues, hence both Netradyne and Nauto have designed their telematics devices to produce short video streams of the triggering safety event, such as images of what the driver was doing immediately preceding the accident. This information is automatically provided to fleet safety managers to reduce driver distractedness and isolate factors causing drivers to become fatigued.

Interestingly, the introduction of electric trucks like Tesla’s first semi tractor-trailer, Tesla Semi, is expected to reduce driver weariness. “Electric vehicles produce less noise and vibration and are easier to drive, helping drivers remain vigilant for longer periods of time,” explained Chris Nordh, senior director of advanced vehicle technologies at Ryder System Inc., a provider of rental trucks and fleet management systems. “Reports indicate that drivers are not as exhausted at the end of the day.”

Electric trucks also are able to withstand more of the damage caused by a collision, said Nordh’s colleague Amy Wagner, Ryder vice president of global product insurance and risk management. “Crash data indicates that electric vehicles are the safest vehicles on the road in the event of an accident,” said Wagner. “Electric vehicles are built on what is called a ‘skateboard platform,’ where the batteries are built right into the frame. This creates a vehicle with a low center of gravity that is also a massive piece of metal. Not surprisingly, we’re at the forefront of bringing more commercial electric vehicles into our fleet.”

Beginnings of a Long-Term Partnership

Insurers are bullish on these varied technological and intermodal transport developments. A case in point is Penn National, which provides financial grants to truck insureds interested in implementing telematics and other safety equipment. “We’ll split the cost of the technology 50-50 up to $2,500, in return for feedback on what the data indicates about claims reductions,” said Mancini. “We can then learn from this data in terms of our underwriting and pricing.”

Other insurers perceive similar value in having policyholders share their experiential data. “It gives us the opportunity to provide more insightful consultation to fleet safety managers,” said Tony Fenton, vice president of Underwriting and Product for Commercial Auto, Casualty and New Product Development at Nationwide. “It puts our loss control/risk management professionals in more of an ‘I know’ environment.”

Netcoh from The Hartford agrees, noting that the insurer’s focus in 2019 is to more closely engage with its truck insureds to better understand their use of telematics. “We’re looking to dovetail their work with the research conducted by our safety risk engineers to improve loss costs,” he explained. Telematics has yet to evolve into a really close data-sharing relationship.”

That’s true. However, Fenton predicts that within the next five to 10 years, such sharing of data will be business as usual. “I can see a day when insureds provide us information on how many drivers are on the road, who these drivers are and how they are driving, and we provide to them information on the location of the vehicle in relation to the accident history of a particular stretch of highway based on weather conditions, traffic congestion and driver time at the wheel,” he said. “As more data becomes available and is shared, insurers can rate a client based on real-time exposures, as opposed to traditional rating programs driven by the type or class of vehicle.”

Wagner from Ryder concurs, pointing to the opportunity for insurers, truck companies and diverse other parties like repair shops to engage in an ecosystem-like software platform. “When you start bringing all these diverse sources of data together, you can create driver scorecards as a means of positive reinforcement to compel better driving behaviors,” she said. “Those scorecards can then make their way into lower insurance rates.”

Need for New Types of Insurance?

As commercial fleets incorporate more autonomous safety features into their trucks, traditional commercial auto policies may need to accommodate new causes of liability. For instance, a collision may not be the result of driver error but in fact be caused by a sensor failure, software glitch or a cyber attack.

Insurer Chubb is presently mulling this new risk landscape. “We have to be prepared to address these new liabilities,” explained Dave Brown, executive vice president and transportation leader in Chubb’s Major Accounts Division.

There are two schools of thoughts on how insurance policies may need to change. “One is whether or not the current commercial auto liability policy is still the appropriate mechanism, assuming some adjustments,” Brown explained. “The other surrounds the use of product liability policies as an alternative or conjunct to commercial auto.”

While Brown is “on the fence,” he said, regarding which concept is best, he believes the longstanding commercial auto policy has a lot of positives to commend it. “For one thing, it allows for claims to be efficiently administered to rapidly take care of injured victims and make them whole financially, whereas product liability claims are highly litigious—consuming time and costs,” he explained. “If a loss is attributed to a sensor or software defect, my thinking is that the commercial auto policy should be the mechanism for the adjudication and payment of the claim, with this insurer subrogating the product manufacturer’s insurer for the loss.”

Down the line, the experts believe that commercial fleets will inevitably become safer. “The next wave is for all these remarkable cameras and sensors to send their data over the Internet to be analyzed with other types of data like historical loss patterns, real-time weather conditions, traffic congestion and even the Department of Transportation’s data on roadside inspections,” said Fielkow. “Really, the sky’s the limit here. Algorithms can then dig through these massive data volumes to unearth specific areas for continuous safety improvements.”

As this happens, Fielkow can see a day when commercial auto insurers and truck carriers work closely together to help each other become smarter about risk management and loss prevention, he said. That’s good news for both parties and for all of us who regularly venture onto a highway.

Russ Banham is a Pulitzer-nominated business journalist and author of 29 books.