3:30 pm - 4:30 pm
Implications of Consolidation: The Merger Feeding Frenzy
Moderator: Brendan Noonan, BestWeek Editor


Sluggish Growth, Excess Capital Driving Insurance Deals The insurance industry's failure to keep pace with the overall growth rate of the economy has added fuel to the engine driving the consolidation trend sweeping through the industry, Wall Street analysts said.

The property/casualty industry, for example, has managed an annual growth rate of just 4%, compared with 6% growth in the gross domestic product, said Michael Smith, insurance analyst at Salomon Brothers. Insurers being acquired tend to fall into two broad categories, he said: those with too little capital and those with too much capital. The latter group he described as "fat, dumb and vulnerable."

Smith was one of four panelists discussing the implications of insurance industry consolidation at "Managing the Information Tidal Wave," A.M. Best Co.'s annual fall insurance issues and technology conference, held in Washington, D.C.

Smith and the other three panelists--Alice Schroeder of Oppenheimer & Co., James Ramenda of Northington Partners, and Michael Frinquelli of Renaissance Fund Advisors--agreed that the prospect of cutting costs was a relatively minor factor driving the latest wave of transactions.

Frinquelli said the main reason for the combinations happening today is to achieve expansion in three key areas: market, product and distribution. Perhaps the biggest challenge for publicly traded companies is to satisfy investors who tend to want to see bottom-line results within one to two years--not three to five years, he said.

The ultimate task many insurers are facing is: "How do you put an abundance of capital to work," Schroeder said. "Excess capital is the major issue." Economies of scale are a relatively minor factor in this trend, she said, adding, "Diversification is back in style. Don't just stand there. Move."

An underlying theme characterizing the current insurer acquisition trend is the dearth of sellers. "Everyone's a buyer, no one's a seller," Schroeder said, because of the industry's over-capitalized condition.

Ramenda agreed that the push to diversify is intensifying. He predicted the merger trend will move away from simple consolidations and toward business combinations.

A.M. Best Co., based in Oldwick, N.J., is an insurance ratings and information provider.