Market Creates Merger Opportunities

Mr. Kelley supported his prediction by comparing some statistics on the structure of the banking industry with that of the insurance industry.

In particular, he noted that market capitalization of the top-10 global banks converged fairly tightly around an average of roughly $65 billion. Although the list was headed by Citigroup with nearly with a market cap of $184 billion, "the point of this [analysis] is that in the financial world, the banking industry appears to have much greater parity than the insurance industry," he said, presenting the companion analysis for insurers.

While AIG and Berkshire-Hathaway headed his insurer market cap list with $103 and $100 billion, respectively, the next two insurers on the list each had only one-fourth of those totals.

Indeed, "if you were to strip away AIG and Berkshire-Hathaway and add up the [market caps of the] next eight, they wouldn't even come close to equaling the market capitalization of the top two," Mr. Kelley pointed out.

He noted that consolidation typically takes place in industries where such disparities exist, in an "attempt to bring balance into the overall structure of the business. Once the dust settles on reserve increases and balance sheet issues,?I think we're going to see very significant consolidation," he said.

"And ultimately, that, I think, is going to have a very interesting play for brokers within the surplus lines business. Because I think that consolidation ultimately creates a lot of distraction and havoc. A lot of people take their eye[s] off of the ball when that occurs, and I think that can create some opportunity in the surplus lines industry," he said.

The panel discussion, entitled: "A View From The Top: An Actuarial View of the Financial Integrity of the Insurance Industry," also featured Jeff Post, chief executive officer of Novato, Calif.-based Fireman's Fund Insurance Companies, Michelle Bernel, chief actuarial officer of the direct treaty division of American Re, and James Carey, president and CEO of Admiral Insurance Company in Cherry Hill, N.J.

Although neither Mr. Kelley nor Mr. Carey are actuaries, their views on the factors impacting the viability of property-casualty insurers and reinsurers were in line with the two actuaries. Yes, there will probably be more p-c failures, they all suggested, as they each pointed to a confluence of external factors that included low interest rates, rising loss trends, and the hot-button issue of escalating tort costs to support their conclusions.

And while Mr. Kelley pointed out that another external impact–a single natural or manmade catastrophe–could change the direction of the market in an instant, panelists clearly had their eyes on more than the winds of Hurricane Isabel blowing in the Caribbean. Looking inward, they repeatedly said that reserve deficiencies and reinsurer struggles were major areas of concern.

Referring to the issue of reserve deficiencies, Mr. Post observed: "When an insurance issue gets to be the number one issue in a state the size of California, you know it is a very big concern."

As for reinsurance, he said: "We have two problems on the reinsurance side?the inability to pay and the unwillingness to pay."

He continued that reinsurers, "are at risk of actually losing their industry because of their unwillingness to pay."

Mr. Kelley observed that there were eight triple-A-rated reinsurers in the world just over a year ago. Now, "there are only two left, and both are owned by Berkshire-Hathaway. So six have been downgraded and that didn't happen in one step," he said, referring to a slide indicating that there have been 18 individual downward revisions from the triple-A categories in a 14-month timeframe.

Mr. Kelley said, "I've been placing reinsurance since the mid-70s, and I have personally never seen a reinsurance market [like the one] we see today."

Mr. Carey noted, "The relationship between primary insurers and reinsurers is definitely changing. We are truly going from follow-the-fortunes to catch-me-if-you-can?and that's not a good thing."

American Re's Ms. Bernal added that some experts have referred to the reinsurance industry as "a leading indicator of the cycle." But reacting to loss trends, she suggested, actually turns out to be a waiting game for reinsurers.

"Unless the companies and the claims people are putting the numbers up in the case reserves, we don't necessarily see the effect of inflation until it's too late and we've underpriced a fair amount of business," she said. "I think that's where [the reinsurance industry is] right now?and we're still trying to dig our way out of it."

More generally, she said, "where we are as an industry?it's not great. We are certainly better off than we were a few years ago. We're starting to get healthier, but we're still weak. We really do need to continue to push on the hard market to be able to recuperate."