Falling Dollar Value Leaves U.S. Insurers 'Vulnerable' To European Takeovers

American property-casualty insurers may see more takeovers by European carriers as the U.S. dollar continues to fall in value on world markets, industry leaders warned during the recent 19th Annual Property-Casualty Executive Conference.

Their remarks came during a CEO panel discussion to lead off the conference, which was sponsored by the National Underwriter Company. Among other issues, the session touched on catastrophe management, federal market intervention and the challenge of how to grow in a soft market.

Vincent J. Dowling, managing partner at Dowling & Partners Securities LLC, said that in the current environment of double-digit capital growth in the insurance industry, resulting in falling premium rates and stagnant premium growth, carriers still have a number of strategic options.

He mentioned expansion of product lines, share repurchases, acquisitions, or even holding onto capital while waiting for "the fat pitch" opportunity--which he said is difficult for a public company to do.

However, one major macro-economic factor U.S. insurers might have to contend with is the fall in the dollar, which is attracting European suitors for U.S. firms, he said, noting the recent $2.2 billion purchase of Commerce Group by the Spanish firm Mapfre S.A.

To Europeans, according to Mr. Dowling, the U.S. property-casualty sector is looking "attractive-slash-vulnerable."

Edmund Kelly, Liberty Mutual Group's chairman, president and chief executive officer, said that at this point there is no p-c company in the United States that "wouldn't be cheap" for a European buyer. He said there will be pressure on many companies to take action to avoid a European takeover.

"Many public p-c companies are glorified bond funds, living off their portfolios," he said. "They are overreserved and overcapitalized, and for a European buyer, this could finance one-third or more of an acquisition."

Discussing the soft market and carrier profitability, Mr. Kelly said he thought a reduction in interest rates would keep the calendar-year combined ratio below 100 until 2020.

Stephen Lilienthal, CNA Financial Corp. chairman and CEO, said he expects that new capital will impact carrier behavior "as we feel threats on our standard book of business and compete on price."

Mr. Dowling said he was concerned by comments from members of Lloyd's who told him they wanted to go after "good, stable American casualty" business, thus heightening competition further.

It was pointed out by Mr. Kelly that technological advances have meant the quality of information management has to work with in adjusting to the marketplace is much better than ever before.

But in response, Joseph P. Brandon, General Re Corp. chairman and CEO, remarked, "I agree the quality of information is way up, but will the quality of senior management decisions be way up?"

In discussing problems in the Florida market in the aftermath of two years of extensive hurricane losses in 2004 and 2005, panel participants bemoaned the moves by state lawmakers to artificially suppress insurance prices.

Mr. Kelly remarked, however, that insurers also have themselves partly to blame. In going after "good auto" business, carriers "gave away homeowners as an industry," and then after catastrophes, "we tried to reprice too quickly," he said.

Mr. Brandon noted that the Florida market has recently drawn some new insurer entries--although he said that on average, the new entrants have only a "B-plus" financial rating.

"If the wind blows, these companies are not going to be there," remarked panel moderator Peter Porrino, director of insurance industry services at Ernst & Young LLP.

Concerning federal intervention to support the market after natural catastrophes, Mr. Kelly rejected the idea, saying if the government moved in, insurers would become regulated "like utilities."

Mr. Lilienthal said artificially suppressed insurance rates should be eliminated and the market should be allowed to work. Giving the risk over to the federal government "would be horrific," he said, adding that the only need for government supports is for terrorism risks, which cannot be predicted.

The concept of requiring companies to set aside mandatory catastrophe reserves, advanced by New York Superintendent Eric Dinallo as a proposed state regulation, drew mixed reviews.

Mr. Kelly said he thought Mr. Dinallo might be off on the details, "but the underlying thought is correct."

Mr. Lilienthal said state-by-state regulation of that sort for the industry "would drive us crazy." Mr. Brandon said what was needed is a federal tax deduction to make such reserves financially feasible and nationally applicable.

Asked to comment on the return on investment from consumer advertising by insurers, Mr. Kelly said he guessed GEICO's ROI was making Warren Buffet, the head of the insurer's parent Berkshire Hathaway, a happy person. "Clearly there is a return," he said, "but the question is whether the firm can sustain it."

Mr. Lilienthal said his company advertises very little to the general public because when he asks, "what do I get for $10- and $20 million [in advertising], there is no bright light," and "I don't see what the ROI is."

Besides the National Underwriter Company, the conference was co-sponsored by Ernst & Young, Dewey & LeBoeuf LLP, Fitch Ratings, Black Diamond Capital Partners and Dowling & Partners.