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Is "Conventional Wisdom" an Oxymoron?
Overview prepared by: Bob Shapiro

On July 22, 2002, 135 insurance executives convened in Lake Geneva, Wisconsin for a half-day symposium on globalization and convergence, with the general theme "What happens when the many become the few while the world becomes smaller?" The proceeds from the symposium and related golf outing benefited the youth education initiative of the Actuarial Foundation.

Five industry leaders, representing a broad swath of the financial services marketplace, comprised the panel. They were:

Jacque E. Dubois, Chairman, CEO and President of Swiss Re America Holding Corporation and Chairman of Swiss Re Life & Health North America.
Franklin W. Nutter, President of the Reinsurance Association of America.
Thomas D. Stoddard, Managing Director of Credit Suisse First Boston in the Investment Banking Division covering the insurance sector.
Stanley B. Tulin, Vice Chairman and CFO of AXA Financial, Inc. and EVP of AXA Group.
Bradley M. Smith, Chairman of Milliman USA, session moderator.

The speakers provided several different perspectives on the often-discussed concepts of "convergence" and globalization. Both Mr. Tulin and Mr. Stoddard expressed skepticism regarding the reality of broad convergence and globalization activity. Mr. Tulin pointed out that few companies successfully distribute both Life and P/C coverages to their customers, citing historic insurance product silos and engrained consumer buying habits. Mr. Stoddard suggested that these buzzwords are used too broadly, predicting instead that convergence and globalization will occur in a limited number of areas and at times when market conditions support such movement. Because there are few truly global players, with Europe focused on the U.S. and Asia, North America focused on Asia, and interest in Latin America coming and going, Mr. Stoddard believes "internationalism" is a better trend description then "globalization."

Mr. Dubois discussed the benefits of selected global markets for international insurers like Swiss Re, describing attractive features as well as pitfalls of emerging markets such as Asia, Latin America, Central and Eastern Europe and South Africa. With growth rates expected to exceed those in mature markets, and barriers to entry falling, Mr. Dubois sees emerging markets continuing to attract significant foreign investment.

Mr. Tulin discussed historic drivers of consolidation and globalization, identifying significant recent changes and how his organization, AXA, fits into this evolving picture. Historically transactions have been driven by (1) the general desire of insurers to have a presence in the U.S. life and savings market and a toe-hold in China, (2) the rich acquisition currency available to high P/E European insurers, (3) the need for growth capital in many sellers, (4) the principle that “size” matters and, until recently, (5) the booming economy. However, the recent bear market/recession, changes in purchase accounting and general investor skepticism have slowed transaction activity. Companies have changed their focus from doing deals to strengthening their operations and balance sheets.

Mr. Tulin provided background on AXA's transaction history, illustrating AXA's current strong and balanced global position. He characterized AXA as opportunistic, excellent at acquisitions and divestitures, and an excellent integrator of insurance and asset management. Although Mr. Tulin sees convergence (i.e., one-stop-shopping) as more rhetoric than reality, he did point out that one “success story” has been the combination of life insurance and asset management.

Mr. Stoddard discussed in detail the steep decline in insurance M&A markets over the past several years. Reasons for this abrupt decline in M&A volume, according to Mr. Stoddard, include lower valuations, weaker and costlier equity markets, negative investor sentiment, new risks and uncertainties (e.g., market conduct, terrorism, etc.) and a general "bunker mentality." Mr. Stoddard described the post-merger integration and digestion that emerged in some deals, as well as differences between the life and property/casualty insurance markets. A hard market has emerged in P/C, in part because of 9/11, and this has made organic growth attractive vis-à-vis the acquisition market.

Looking to the future, Mr. Stoddard sees a new game emerging. The demutualization boom has largely run its course, leaving a number of new but often-vulnerable stock companies. Recent hard markets have led the property/casualty industry to raise substantial capital. The boom/bust phenomenon in p/c will likely continue. And the playing field between the U.S. and European has been leveled. All this points to an eventual resumption of M&A activity, but only when market conditions stabilize. Valuations should also increase, Stoddard says, but it may take a while to do so.

One of the more interesting subjects discussed was how to position the industry and the government to deal with future terrorism risk. Mr. Dubois pointed out that terrorism risk severity and frequency are not measurable, and that private insurers need time to build up their covers and capacity. A public-private partnership is needed, at least for a limited time, to address the gap between high demand and limited supply of terrorism coverage. Current government excess reinsurance proposals call for an industry deductible for P/C exposure in the range of $10–20 billion as well as a company specific deductible (House version). Life and A&H participation is still being examined.

Mr. Tulin argued against life companies limiting their terrorism coverage or looking for a government backstop. The September 11 death toll of 3,000 was a very small percentage of the total number of life industry death claims in 2001. Mr. Tulin said that if a terrorist attack was large enough to imperil the life industry, many other American core institutions would also be imperiled, and much broader government assistance would be needed.

Mr. Nutter described key trends currently driving change in the P/C reinsurance industry. The search for security, and the need to mitigate volatility and severity of claims, are guiding financial decisions and related consolidation activity. One consequence is that medium-sized reinsurers are being squeezed. Size has become important, with a future market that is likely to contain a combination of large general reinsurers plus a handful of niche players.

Along with size and strength, strong underwriting and technical analysis are essentials in today's "back to basics" approach to the business. Broker consolidation continues. The lack of excess capital in the industry augurs for a continued hard market. Finally, Mr. Nutter pointed out that U.S. reinsurers are increasingly developing an offshore presence, while at the same time Bermuda reinsurers are establishing a presence on-shore.

A number of challenges were posed by the speakers as they shared their experiences. How does a company achieve scale economies in global expansion, given the tooling up, regulatory, product and other adaptations that have to be made in each distinct culture and market environment? What form of public-private partnership is best for dealing with catastrophes such as 9/11 where frequency and severity are unpredictable? Where can convergence be expected to occur and where will it be muted?

All proceeds from Clambake 2002 benefited The Actuarial Foundation's youth education initiatives.

Next year's event is tentatively scheduled for August 10–11, 2003 in Lake Geneva, WI. Topic for the 2003 event is Corporate Governance.

This event was intended to be a non-commercial discussion of issues facing our industry. The sponsors and/or hosts make no warranties as to the accuracy of the information contained in the presentations. Statements of fact and opinions expressed during the presentations are those of the individual presenters and participants, and not those of The Actuarial Foundation, its officers, directors, or employees. The Actuarial Foundation does not endorse or approve, and disclaims any liability or responsibility in connection with, the content of the presentations.