On Victims of Love

Albert Benchimol, to be the new head of Axis and Partner Re.

Love is seemingly in the air in 2015 with the engagement of Axis to Partner Re recently announced hot on the heels of the betrothal of Catlin to XL. Guessing who will be next up the aisle is the favourite game in the coffee shops and wine bars of the London Market. Few doubt that by the end of this year, more companies will get hitched up.

There is more to this wave of coupling than true romance of course. The hard market gallivanting has come to an end because companies now yearn for the security of a long term partner to survive the austere times ahead. Declining premium rates almost everywhere; distribution concentrated into an ever-decreasing group of global producers; and a burgeoning industry cost-base are making many companies feel very vulnerable, hence the desire for scale.

But for whose benefit? Who wins and who loses in a world of fewer, bigger insurance suppliers?

Such is the way of the modern times, it is a given that the CEOs and senior management who fashion these deals tend to do alright. However, for the investors that they represent, the upside is less certain. Handled badly the execution of a merger can be disabling and expensive, eroding shareholder value rather than adding to it. That is why the announcement of a takeover is invariably met with a sell-off not an uptick in the stock market for one of the parties concerned. Ever since the Royal Sun Alliance merger in the 1990s, which was a complicated affair, analysts have been sceptical about insurers’ ability to pull off integration effectively, explaining their jaundiced view.

For the customer, consolidation has advantages. Financially stronger companies with broader product and geographic capabilities can offer more security and arguably respond with improved effectiveness to the emerging mega risks that are shaping the world today. Equally, on balance regulators probably like strongly capitalised, more solvent companies better equipped to meet customers’ needs. Yet a market place where there are fewer and less agile players, lacking individualism has its disadvantages too. Clients searching for a wider range of choice may end up disappointed. A narrower range of homogenous suppliers competing for business, all doing the same thing, might please the regulators less, especially if a systemic risk of failure creeps into the system.

It is a mixed bag perhaps for investors and customers at either end of the current bout of merger frenzy. While one hopes that it is not the case, however, the employees of some companies involved could be the real losers in the love triangle. Where the underlying driver is cost reduction, the pressure to cap out or reduce headcount will be intense. In an environment where talent is a differentiator this might be shortsighted. Nonetheless as we approach St. Valentines’ day, some insurance workers will be waiting for the mail to arrive, with trepidation rather than the usual anticipation: the victims of love.