The insurance industry has entered a period of sustained consolidation, both domestically and internationally, as a result of the Sept. 11 attacks, according to a year-end forecast by the Transaction Services group at PricewaterhouseCoopers.
Bill Chrnelich, a Transaction Services partner, commented, “The industry will emerge stronger from this stressful period, but with fewer companies. The September 11th terrorist attacks are clearly accelerating the ongoing consolidation and globalization of the insurance industry.”
Chrnelich pointed to the following factors:
The weak will not survive. With industry estimates upwards of $50 billion to $70 billion in losses from attacks on the World Trade Center and the Pentagon, weaker players – and those with a disproportionate share of the claims – may become targets for takeovers, workouts or bankruptcies over the next six to twelve months.
Depleted capacity will dictate developments. In the wake of Hurricane Andrew, the second most expensive catastrophic event in the insurance industry’s history, and the earlier capacity crisis in liability coverage, several new companies were formed through M&A activity to take advantage of soaring premiums and demand for capacity. These include Mid-Ocean, ACE Ltd., XL Ltd, Tempest, and Partner Re.
Capital flowing into insurance companies since September 11th has similarly spawned several new ventures including Axis Specialty, a $1 billion aviation, war and political risk insurer and reinsurer formed by Marsh & McLennan; an aviation joint venture funded by AIG, Chubb and Goldman Sachs; DaVinci Re, a property catastrophe reinsurer launched by RenaissanceRe and State Farm; the $750 million stake taken by private equity firms Warburg Pincus and Hellman & Friedman in the new, Bermuda-based reinsurance arm of Arch Capital; a $1.3 billion capital offering by ACE Ltd , a new venture sponsored by Zurich Financial and AEON with $1.2 billion of projected capital, and the expected IPO of Converium. The difference between the aftermaths of Hurricane Andrew and September 11 is that the ante has more than doubled, reaching about $1 billion, compared with $250 to $500 million after Hurricane Andrew. Clearly financial strength will be a big factor in winning the confidence of insureds and reinsureds.
Cross-border deals are looking better. European companies are keeping a close watch on their American peers, with takeovers possible as the harder hit firms become attractive targets.
The banks still are not coming. Despite a clear regulatory go-ahead, banks are not buying insurers in a big way, preferring to focus on the fee-generating side of the business by acquiring insurance agents who offer products that can be funneled through their branch networks.
Credit risk is a possible sleeper. Although capital will flow into the industry from policy reinstatements and renewals, and both public and private market offerings, credit risk within reinsurance portfolios has grown dramatically in the last four to five years. For some large companies, credit risks arise from the capital markets, in the form of derivatives backed by insurance products. If the economy continues to worsen in the near term, there could be significant credit losses for insurance companies and banks, especially among the weaker players.
Chrnelich said, “Insurers and reinsurers typically cite two to three major catastrophic losses in a single year as their ‘Armageddon’ scenario. The destruction of the WTC, part of the Pentagon, and four commercial airliners comes close to that scenario — not enough to bankrupt the major insurance and reinsurance companies, but clearly enough to catalyse the industry’s ongoing consolidation and globalization.
“What happens next will depend on the terms of upcoming January 1st reinsurance renewals, positions taken by the courts in settling claims from September 11th, and the fine print in the insurance legislation currently before Congress. A lot depends on how governments and the global economy react to the war on terrorism.”
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