In the words of the great Michael Scott from the NBC show, The Office, "The word 'merger' comes from the word 'marriage'. That was what today was supposed to be - the loving union between people. Instead, it has become like when my Mom moved in with Jeff. And, once again, it becomes my job to fix it." Mergers and acquisitions can be complicated, but that has not stopped the insurance industry from producing its fair share of them lately.
ACE recently agreed to acquire Chubb for $28.3 billion. ACE and Chubb believe that the combination will create efficiencies that will allow for investment in people, technology, products and distribution. John D. Finnegan, chairman, president and CEO of Chubb indicated that "The combination brings together two highly respected and successful companies with complementary capabilities, assets and geographic footprints". The combined company with eventually operate under the Chubb name and will be led by Evan Greenberg, Chairman and CEO of ACE.
Since late last year, multibillion dollar consolidations on the property and casualty side - inclusive of the reinsurance marketplace - have been announced by XL and Catlin, Axis and PartnerRe, and RenaissanceRe and Platinum Underwriters. The industry has experienced rapid consolidation as exemplified by some of these larger mergers and acquisitions.
Additionally, the health insurance market has seen a recent spate of M&A activity. This activity will further consolidate an already concentrated health insurance industry in the U.S. from five major insurers to just three. In early July, Aetna announced its intent to acquire Humana in a $37 billion deal, the largest ever such transaction in the health insurance sector, only to be outdone three weeks later with Anthem's merger announcement with Cigna - a $54.2 billion transaction that would create the largest U.S. health insurer. Both deals are subject to satisfying anti-trust regulatory scrutiny prior to their expected close sometime in the later part of 2016.
What are the implications of these recent announcements and what is in store for the property and casualty and health insurance industry going forward?
In light of these transactions, there is speculation looming over the potential for additional property and casualty consolidation. There is conjecture that some of the larger insurers - AIG, Allstate, Travelers - could be interested in some of their smaller peers. The speculation is stemming from the low interest rate environment, low inflation, the desire to put capital to work and the increasing globalization of their client's operations. This could affect valuations for insurance company and other insurance related private equity backed portfolio companies.
Further consolidation could result in less competition and thus the potential for increased rates. The ramifications in the reinsurance industry should be interesting as well as the amount of risk that the combined entities will need to reinsure has the potential to contract. The combined assets of larger companies may give them the financial ability to retain additional risk thus reducing the need for reinsurance.
While the recent rush of health insurance merger activity leaves little opportunity for further consolidation among the large national health insurers, it is likely that additional consolidation could be seen among the more regional and localized health insurance markets. Shifting insurance markets and additional legislative requirements under the federal Affordable Care Act, as well as consolidation among hospitals and other health care providers are catalysts for this merger activity, which should help insurers pare costs and negotiate reimbursement rates more aggressively to combat increased leverage among healthcare providers. Insurance companies are banding together to take on what they perceive as a threat to their collective survival. Larger insurance companies could be viewed as "too big to fail" in the wake of additional liability uncertainties posed by the ACA. Their sense of urgency also stems from concerns that government regulators will at some point block potential combinations as anticompetitive, and those last to the table will likely find themselves without a chair.
The longer term implication for the health insurance industry is harder to predict. The opinions from both the payer (health insurers) and provider (hospital and physician groups) are, not surprisingly, sharply divided. One thing is for certain. It will be a difficult transition for employers, their employees, and individual consumers. Mergers of health insurers could counterbalance the growing power of health care providers, whose years of hospital consolidation and acquisitions of physician provider groups have largely been blamed for steeper health care costs. However, if the past is a prologue, while insurer consolidation traditionally has led to lower reimbursement rates for hospitals and doctors providing care, those savings have not been passed along to patients. Fewer options for insurance also means less competition in certain markets, which could lead to higher profit margins for insurers at the expense of increased premiums and less choice for consumers and the employers that provide health insurance.
We have seen a historic amount of industry consolidation and many people believe that further consolidation may be around the corner. With all of that being said, the future continues to remain uncertain as the recent consolidation will have lasting effects on the insurance industry. Just ask Forrest Gump's momma who always said that "life was like a box of chocolates. You never know what you're gonna get."
We hope you found this Partners' Perspective helpful and informative. Please contact your Equity Risk Partners professional for more information. As always, we appreciate the opportunity to be of service and thank you for the continued support of Equity Risk Partners.