Will Your Insurance Company Survive?
from January/February 2002
What did September 11 do to insurers? Which will make it and which will be hurting? Peter Mattingly, head of an eponymous firm in New York City that advises insurance companies on M&A strategies, assesses the terrorism fallout:The most immediate impact has been on major reinsurance companies such as Swiss Re, Munich Re, and General Re (owned by Berkshire Hathaway). These large, well-capitalized companies are fully capable of handling significant losses. The one exception may be Lloyd’s of London, where several syndicates could sustain losses that they will find difficult to handle on their own. They’ll have to seek outside capital, either within Lloyd’s or from private investors. Both will be expensive, and Lloyd’s may have casualties of its own.
Midsize property-casualty companies will feel the greatest pain, not so much from September 11 claims but when they begin to renew their reinsurance policies in January 2002. These companies rely on reinsurance to spread their risk, and the cost of it will rise significantly. Reinsurance will be available, but at a price. Midsize outfits will have difficulty increasing their rates enough to absorb the higher costs.
If the economy experiences an extended downturn with low interest rates, then the pain will spread to a wide variety of life and property-casualty companies that incur long-term liabilities. Midsize writers of ordinary life or annuities could be hurting. These companies have probably been pricing their products on the assumption that their fixed-income investments will earn rates higher than will be available in an extended downturn.
The next six months will probably see modest M&A activity in the insurance industry while companies assess the impact of September 11 on their own financial condition. Starting in midyear, though, activity should pick up noticeably as the stronger companies begin acquiring those weakened by terrorism.
