Insurance Industry Acquisitions: Is Bigger Better?
In our previous post, we discussed the fairly recent uptick in consolidation in the insurance industry, stating that agencies decide to participate in mergers and acquisitions for a number of reasons, including acquiring other firms for their existing employees’ skills and experience. No matter the reason, as a trusted Insurance Broker Resource, we’d like to shed some light on the motives behind mergers and acquisitions.
There’ve been many factors contributing to the wave of acquisitions we’ve seen in the past decade in the middle-market insurance industry. The U.S. insurance industry is very large, comprising of over 2,000 property and casualty insurance companies, and 20,000 insurance brokerage firms. In the past decade, property and casualty insurers have been motivated to sell due to capital concerns, low interest rate, and premium price inactivity.
On the contrary, smaller property and casualty insurance companies are being quickly acquired by larger agencies because most of them do not have the access to growth capital that larger companies have. In addition, their returns on invested capital are restricted by state regulators and have been poor. The smallest of the property and casualty insurance companies, those valued below $500 million, have been challenged by an inability to raise rates due to the recent lack of significant claims.
Attorney Bob Shapiro, who counsels insurance companies on transactional and regulatory matters, states that “Companies are realizing that they really can’t compete.” He continues, “Large insurers can afford to diversify along several different lines, so that if one line has a soft market and they’re not able to get rate increase, they can divert capital to other lines. That’s not true with the smaller to midsize companies.”
Given this data, a number of professionals in the industry feel that insurance firms are finding that bigger may in fact be better; with insurance companies nationwide benefiting from these consolidations.
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