Economic Troubles To Spur Consolidation

The insurance industry can expect some consolidation going forward, as big companies get bigger and weaker companies struggle to survive the current economic challenges, an expert said today.

Speaking during an Ernst & Young teleconference, “Financial Crisis And The Insurance Industry,” Robert W. Stein, global director of Actuarial Services, Ernst & Young LLP, said weaker companies will likely not survive going forward, and that will lead to increased consolidation in the industry.

Mr. Stein warned, “There are issues on the banking side as to whether the rise of mega institutions is always a good thing, but it’s quite clear that we will see the big getting bigger, and I think with that will come a little bit of increase in complexity and risk profile—perhaps undesired, but nonetheless part of the ‘getting bigger’ situation.”

He predicted that many insurance companies will restructure and sell non-core businesses to raise capital, which will lead to a change in business profile throughout the industry.

David Schieldrop, managing director, Barclays Capital, commented, “Out of difficult times comes opportunity for some.”

He said a lot of properties are coming to market while valuations are under “severe stress”. He said the current mergers and acquisitions environment is a “once in a generation opportunity” for people to acquire some of the largest franchises in the industry, and he mentioned the expected sale of several American International Group properties as an example.

He noted that with valuations as stressed as they are, though, there is less incentive to sell. The activity over the next year will likely be AIG and other distressed situations, Mr. Schieldrop said.