The growing number of reinsurance mergers is understandable considering that the flood of alternative capital has upended the industry’s economics. If companies don’t lower their cost of capital and become more efficient, they will have a hard time competing in a world with continued pressure on premium rates.
Executive SummaryWithout growth, the level of profits of P/C primary insurers will ultimately fall. In fact, Assured Research analysts believe the industry has reached the lack-of-growth tipping point tilting toward consolidations, which are soon going to be required to meet profit hurdles. But will they enhance value? Here they examine the question and review the history of P/C deals.
But, to us, a more interesting question is whether there will be an increase in deals among primary companies. Our answer to this is yes because the lack of growth in the industry has become more apparent and, in the absence of meaningful growth, returns will eventually decline. Looking forward, we believe companies are going to have to pay more attention to mergers as a profit and growth enhancement strategy.
The Slowing Growth/Falling Returns Dilemma
Every industry eventually transitions from growth to maturity, and the property/casualty industry is no exception. Until the mid-1980s, P/C insurance was a growth business as new coverages were being developed for casualty risks, and this, among other reasons, propelled premium growth in excess of 9 percent annually from the 1950s through the 1980s.