Money to Burn.

Overcapitalization and deregulation challenge property/casualty insurers.

Leading executives of property/casualty companies say that industry fundamentals seem to be improving, but rapid changes in technology, deregulation, competition and customer expectations make for an uncertain future.

On top of that, trends such as consolidation and globalization continue to reshape the industry, according to speakers at the 11th annual PricewaterhouseCoopers Executive Conference for the Property/Casualty Industry in November, a forum that brings together prominent insurance leaders to discuss critical issues facing company management.

Douglas W. Leatherdale, chairman of the St. Paul Cos., said prices are moving up, but no one knows how long this increase will continue. Meanwhile, companies are opportunistically entering property/casualty markets. This is aided by the fact that the pace of commercial lines deregulation is escalating, which increases the opportunities for commercial insurance companies domestically and worldwide, he said.

Leatherdale added that the industry remains overcapitalized, a condition that has fueled years of price competition and consolidation. "This will continue to plague the industry," he said, noting that property/casualty companies have more than $100 billion in excess capital.

In his address, Leatherdale predicted that continued consolidation in the property/casualty arena will result in domination by a few large, global and diversified companies.

One example is Bermuda-based Ace Ltd. Over the past five years, Ace has been "highly acquisitive," said Brian Duperreault, chairman, president and chief executive officer, who discussed the management of a globally diversified company. Ace's recent acquisitions include Tempest Reinsurance Co. and Cigna P&C and Capital Re Corp., among others. Ace operates in 48 countries and as of November had generated a total volume for 2000 of $6 billion in gross premiums written, "Our goal is to assemble capacity for most of our business to meet customer needs anywhere in the world," Duperreault said.

Foreign Invasion

A recent survey conducted by the Alliance of American Insurers, a national trade association representing 312 property/casualty insurers, showed that 50% of respondents expect foreign insurers to be more aggressive in acquiring U.S. property/casualty companies, said Rodger Lawson, president of the AAI.

Victor Lopez-Balboa, managing director of Goldman, Sachs & Co., said that despite a recent slowdown in merger-and-acquisition activity, the trend still points to substantial future consolidation in the market, but for reasons different from those of the past. Company officials used to think all they had to do was make an acquisition and they would realize cost savings and earnings growth, he said. These days, however, potential buyers consider balance-sheet strength and earnings quality to be of paramount importance. Also, there's an emphasis on strategic transactions that provide product and distribution as well as cost benefits, Lopez-Balboa said.

In recent months, "there have been a lot more sellers than buyers," he said. A period of declining returns and lower stock prices has prompted many companies to be more inward-looking.

Profound Changes

To John J. Degnan, president of Chubb Corp., the insurance industry--which evaluates and prices risk probabilities--is "surprisingly resistant to change." The future will contain such profound change that the industry must look at it in ways that are not constrained by past experiences, he said. Incremental change will not characterize a future "which is technologically propelled into spaces we have never imagined, much less experienced," Degnan said.

Technology is advancing at warp speed, transforming the way we live, communicate and do business, he said. However, insurers have yet to provide the level of customized service that consumers have come to expect in ordering books or managing their banking needs online.

Furthermore, he said, the vastness of cyberspace, coupled with the globalization of our economy, "have introduced even the smallest companies to foreign business opportunities and exposures they never dreamed of before." But he questioned whether any U.S. insurers today could handle customers' claims in multiple languages and foreign currencies.

Also, today's customers are better informed and more demanding of good service in exchange for their business and loyalty, Degnan said. "Insurers will have to work just as hard to keep their customers as they do to attract new ones,' he said.

Focus on Core Business

In this environment, it's more important than ever that insurers be clear about what they offer in the marketplace, Degnan said. Insurance companies are spending less time these days "trying to be all things to all people," something they can no longer afford to be, he said. "Instead, most of us are--or should be--concentrating on our chosen strategic path."

Only a few years ago, Chubb's mission was to become a global, diversified financial-services provider, Degnan said. But that changed in 1997, when the company took a hard look at its strategy. Chubb then decided to sell its life insurance and real estate operations and concentrate only on expanding its specialty property/casualty business.

"In essence, we sized up our core competencies, took a look at what was producing the best internal rate of return and decided to allocate our capital in a balanced fashion between stock repurchase and our P&C operations;' Degnan said.

A major topic at the conference was the prospect of multiple distribution channels, with a decided focus on online transactions.

"The Internet will play a bigger role in the distribution of property/casualty products," said Richard J. Quagliaroli, executive vice president, sales and marketing, Hartford Financial Services Group Inc. "The Internet will become another pipeline consumers can use for property/casualty insurance.

Hartford has been offering interactive personal lines quotes since May 1999, Quagliaroli said. Last quarter, it achieved $5.2 million in Internet-generated premium. "We look at that and see it as a true engine for future growth," he said.

                  U.S. P/C Insurance Merger Transactions
               DEALS
1995      $6.8   5
1996      $0.2   1
1997      $7.5  15
1998     $12.7  17
1999     $16.7  18
2000 [*]  $6.5   5
Data represents transaction values based
on year of announcement and reflects
transactions in which transaction value
was publicly disclosed to be greater
than or equal to $100 million.
(*.)As of November 2000.
Source: Goldman, Sachs & Co.
                  U.S. P/C Insurance Net Premiums Written
1989 $209
1990 $218
1991 $223
1992 $228
1993 $242
1994 $251
1995 $260
1996 $269
1997 $277
1998 $282
1999 $287
3.3% Compound Annual Growth Rate
Source: A.M. Best Co.