Carriers Consolidating Portend Profits

Consolidation in the insurance and reinsurance markets is heating up, and analysts say the trend is likely to continue amid soft pricing and weak investment returns.

Together weak investment income and a soft market equal profitability issues. Consolidations signal a drive towards profits through cost reductions in staff, physical plant, accounting and compliance personnel and information technology functions.

The deals are also getting bigger, and the result could have a significant impact on what was once a competitive California workers’ comp market.

A report by analysts at A.M. Best notes that the size of the deals announced over the last year plus have been steadily increasing. The characteristics of the companies involved entering into the deals is also evolving, says A.M. Best analyst John Andre in the report. “The days of a ‘white knight’ riding in to save a troubled company has given way to deals characterized as a combination of equals,” he notes.

That’s how he characterized the proposed deal between Ace (NYSE: ACE) and the Chubb Corporation (NYSE: CB).

Ace’s proposed acquisition of Chubb is worth some $28.3 billion. The proposed merger would join California’s 14th and 17th largest writers of workers’ comp coverage with Chubb being the larger group of the two. Based on 2014 writings, the combined entity would account for over half-a-billion in California workers’ comp premium putting the combined group in ninth place with a 4.5% market share. That doesn’t count ACE’s large participation in PEOs nationwide.

The deal is projected to reduce expenses and generate efficiencies that will bring down costs. Best notes that the companies anticipate annual savings of $650 million pre-tax from the areas where the two companies operations overlap.

“However, there are often significant execution risks associated with deals and the operational consolidation that will be required to realize expected efficiencies,” the report notes. “A combined entity can lead to economies of scale and reduced regulatory cost burdens, although value from synergies and a reduction in expenses will depend on successful post-completion integration and the need to offset upfront transaction costs.”

Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.