The chairman and chief executive of Gen Re has been the latest to warn those involved in the swathe of re/insurance merger and acquisition (M&A) activity within that expanding for the sake of doing so is a dangerous strategy to undertake.
Tad Montross, who was speaking at the Reactions North America Conference in New York last week, told delegates that while diversification is often talked about and regarded as a strategy, it is a mistake to do so.
“Diversification is often talked about as a strategy, and it’s important to recognise that while diversification in of itself is a major tenet of insurance, it is not a strategy.
“In fact, I would say the operating risk would trump the diversification benefit for most lines of business.”
Montross argued that diversification “is a byproduct of a well underwritten book of business”.
The re/insurance industry has witnessed a never before seen level of M&A activity in the past year, with companies teaming up across the marketplace. Some of the many deals to have taken place include XL Group’s capture of Catlin Group, Endurance’s purchase of Montpelier Re, RenaissanceRe’s acquisition of Platinum Insurance Holdings, Ace’s deal for HCC, Fairfax’s bid to buy Brit, RSA’s sale to Zurich and more recently Ace’s move to merge with Chubb.
This week also saw Mitsui Sumitomo make a bid for Lloyd’s insurer Amlin.
“Everyone has been talking about this M&A activity,” said Montross.
“It’s been frenetic out there. Everyone is looking for a partner and everyone is scared they’ll be left single at the party.”
Montross warned that scale for scale’s sake is not a successful growth strategy, once again highlighting the frequently heard “one plus one rarely equals two”.
“A lot of these transactions are being predicated on one plus one will equal something greater than two,” Montross said, before adding:
“A McKinsey & Company study from two or three years ago stated in their analysis that 50% of transactions do not create any shareholder value whatsoever. So just getting together to get together is a very dangerous strategy.”