November 28, 2001 by Canadian Underwriter
Following the September 11 terrorist attacks, the industry has begun to see worldwide consolidation, and this is expected to continue, says PriceWaterhouse Coopers. In its yearend forecast, PWC’s Transaction Services Group says there will be more merger and acquisition (m&a) activity, resulting in fewer companies in the future, but a stronger industry overall.
“What happens in the m&a market over the next 12 months will determine to a large extent how well the industry is capitalized and how well it is prepared for new disasters over the next five years,” says Bill Chrnelich, a partner in the group.
He predicts weak players will not survive the post-September 11 market, and those with high September 11 exposures may also find themselves targets for takeovers. This may be especially true for American companies, who could become targets for European companies. However, he does not predict banks will be any more eager to buy insurers in the U.S. than they have been so far.
At the same time, new companies are forming through m&a to take advantage of depleted capacity and hardening rates. He points to new ventures such as Marsh’s AXIS Specialty, the AIG/Chubb/Goldman Sachs venture, and DaVinci Re, formed by Renaissance Re and State Farm. These companies will have to be better capitalized than those that arose in the wake of Hurricane Andrew, with a new standard of $1 billion, almost double that of the $250-500 million common in the post-Andrew ventures.
He also predicts credit risk could become a key issue. “If the economy continues to worsen in the near term, there could be significant credit losses for insurance companies and banks, especially among the weaker players,” the forecast concludes. Credit risk in reinsurance portfolios has increased in recent years, playing into this issue, despite the industry’s heavily capitalized state.
Chrnelich says that there are several factors that will impact the consolidation scenario moving forward. These include how governments deal with terrorism risks, court decisions resulting from September 11 claims and how the upcoming January 1 reinsurance renewal session shakes out.