The barbell phenomenon
Joseph Petrelli, president of financial analysis firm, Demotech, discusses the specifics behind mergers and acquisitions activity.
A study by Deloitte noted that in 2014 eight mergers and acquisitions (M&A) transactions of $1 billion or more were recorded. Out of 399 transactions reviewed, 2 percent received the majority of attention from financial publications. This reminded me of the ‘barbell phenomenon’—when activities are highest at each end of a spectrum with negligible activity in the middle. In a domestic property and casualty (P&C) insurance marketplace with low premium growth and aggressive competition from alternative capital, reinsurers were attractive targets for M&A. Reasons included securing market share, economies of scale, improving shareholder value, and obtaining additional talent.
At the other end of the barbell, unnoticed due to size or limited market share, was the M&A activity of regional insurers. Two unique dynamics may exacerbate the ability of the larger entities to fulfil their expectations.
These dynamics are management succession and mitigation of reinsurance costs through diversification. More than 2,600 P&C insurers report data to the National Association of Insurance Commissioners, with approximately 800 operating predominantly in a single state. Each insurer must comply with regulations regardless of size and meet the expectations of stakeholders.
The smaller insurers manage an ongoing balancing act. For some, it was easier to merge with an entity competent in the task than to search for management both capable and interested in the challenge.
Similarly, M&A was viewed as a way to mitigate reinsurance costs via geographical separation and differences in exposure to wind, flood, or earthquake. Coverage specialists, focused on property insurance, sought other specialists to complement their portfolios of products and mitigate the proportionate impact of reinsurance costs.
The mergers of publicly traded reinsurers were focused on securing market share and scale to satisfy the demands of stakeholders. At the other end of the barbell, their target market was securing managerial relationships that often reinforced a relationship with the surviving entity’s reinsurers in order to minimise or manage the cost of the reinsurance.
We will see which companies at each end of the barbell have their expectations become reality, and whether the middle of the barbell will benefit or be adversely impacted by these phenomena.
Joseph Petrelli is president of Demotech. He can be contacted at: jpetrelli@demotech.com
