Despite the recent uptick in reinsurance company mergers, corporate combinations can be a challenge to pull off successfully, two industry analysts said at the recent CAS Seminar on Reinsurance in Philadelphia.

Stock analysts Meyer Shields, FCAS, managing director of Keefe, Bruyette & Woods, and Alan Zimmermann, managing director of Assured Research, responded to questions from moderator and panelist Timothy Aman, FCAS, before a crowd of 200 actuaries at a session titled “Mergers & Acquisitions in the Property & Casualty Industry.”

Shields remarked that the current wave of consolidation arrives after two to four years of low rates that have driven profits lower for a given level of risk. To offset, reinsurers feel the need to grow and diversify.

Meanwhile, he said, insurers are holding more risk themselves.

Smaller reinsurers, Shields stated, can be caught in a groupthink in which companies, investors and other observers believe that bigger companies are inherently better. Size brings some expense efficiency, he said, but there are not a lot of economies of scale in underwriting.

Zimmermann, with more than three decades of experience analyzing property-casualty insurers, has changed his view on mergers. He previously saw them as a largely negative shift, since a company’s largest liability, loss reserves, is difficult to value. Actuaries are often asked to assess the reserves of a potential merger partner and take on other quantitative roles.

A significant reinsurance merger can drive expenses $200 million lower, he said, but bank combinations can save billions.

“The seller knows a lot more about his reserves than you do,” Zimmermann said. Often those reserves were inadequate and the acquiring company ended up taking a charge to top up.

Now the property and casualty market has been so mature for so long that further conventional growth seems difficult, Zimmermann said. Merging and buying entire books of business make more sense.

He agreed that mergers rarely bring underwriting efficiency and noted that insurance mergers generate meager expense savings compared with combinations in other financial industries such as banking. A significant reinsurance merger can drive expenses $200 million lower, he said, but bank combinations can save billions.

The analysts also weighed in on a variety of merger-related topics:

• When asked which groups tend to “win” and “lose” in a merger, Shields stated that winners include the seller’s shareholders (they usually receive a premium for their shares), as well as the industry at large, as the merger winnows the competitive field by one company. Conversely, mergers can be tricky for the acquiring company, though, because “they are assuming all of the risk.”
• Mergers naturally cause what both analysts termed “social issues,” such as questions from employees about new leadership and the company culture moving forward.
• Investors outside the industry sometimes see value in insurance that insurance companies don’t see themselves. One example, Shields said, is the growth of insurance-linked securities. These bonds reinsure a share of the risk an insurance company bears and are structured so pensions, hedge funds and other investors can buy them. Another example, Shields noted, was the offer that an Italian investment company, Exor, made for PartnerRe. Exor is best known for owning a controlling share of Fiat Chrysler. Exor and other investors, Shields said, want to follow the example of Berkshire Hathaway, whose insurance operations have funded corporate acquisitions for decades and made a legend of top executive Warren Buffett.

Shields said it is often hard to succeed in reinsurance, as Buffett himself has noted. But the actions of Exor and others prove that there is value in reinsurance, even if it sometimes comes from an outside eye.

James P. Lynch, FCAS, is chief actuary and director of research and information services for the Insurance Information Institute in New York.