Brooklyn, N.Y.
While true merger and acquisition activity in the property and casualty insurance industry isn't occurring at the pace of prior soft markets, a form of consolidation is occurring as concerned agents and brokers move business to safer havens, a top insurance official pointed out.
Jay Fishman, chair and chief executive of Travelers, made the observation during the opening session of the recent Standard & Poor's Insurance 2009 Conference, noting that agents are concerned in particular about carrier service capabilities.
The Travelers executive was responding to a question posed by Thomas Upton, an S&P managing director, who suggested that some of the ingredients for mergers and acquisitions are now in place. For example, carriers unable to achieve organic growth might be looking for growth through acquisitions, Mr. Upton said.
Mr. Fishman responded that what's occurring, rather than deals in which one carrier or an outside capital provider buys another, is a trend he calls "organic consolidation."
"There is a real flight to quality going on," he explained. "It's not dramatic [and] it's not happening terribly quickly, but it is happening," he said.
The result of this flight, he predicted, may be that "you're going to end up with some 'organic consolidation,'" he said, explaining that, in other words, "market share is going to move around."
Business is going to move "for the right reasons," he asserted, listing comfort with the financial capacity of carriers and confidence in the ability of carriers to service business over the long term as the key drivers.
Service is a serious issue for agents and brokers, who are less concerned about the ability of struggling insurance companies to pay claims. "Everybody's pretty relaxed about that," he said. "What they are not so relaxed about is who is going to be there to answer the phone in two, three or fours years, [and] therefore can you provide appropriate service to your customer if you're an agent or broker."
Two other executives on the panel–Constantine "Dinos" Iordanou, president and CEO of Arch Capital Group, and Evan Greenberg, chair and CEO of ACE Ltd.–addressed Mr. Upton's question about M&A trends by revealing their individual appetites for deals.
Mr. Iordanou said his firm has a bias toward building business "brick by brick" instead of acquiring, while Mr. Greenberg said ACE historically has pursued strategic acquisitions.
"We're only active in M&A when it furthers our growth strategy" in a particular area, but don't do deals simply "for the sake of size" or to engage in "financial gymnastics," Mr. Greenberg said.
Mr. Iordanou said his firm has "a bias toward building organically–[by] finding teams and giving them a platform." He added that "the most critical component of any organization is the culture, [and] any time you do an M&A transaction, you are playing with the psyche of your organization."
"It takes a long, long time to build an underwriting culture" and a service culture, said Mr. Iordanou, explaining his preference for building "brick by brick or block by block, and trying to get organic growth by attracting business [away] from…competitors for whatever reason."
Speaking to the overall trends for the industry, Mr. Greenberg said "it's a mixed bag," outlining some reasons why deals may occur as well as roadblocks to potential deals. The biggest roadblock, he said, is the availability and cost of capital.
On the other hand, at this point in the insurance cycle, "there may be many smaller players who feel pressured," he said, suggesting this could spur some activity.
In addition, he said, there are many financial institutions that are reviewing their assets that will divest non-core assets, suggesting that some of these might be insurance operations.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.