MERGERS CHALLENGE NAPSLO

ORLANDO, Fla.-Insurance industry consolidation is producing a mixed bag of opportunity for the surplus lines market.

Long-term relationships are being disrupted as merging companies close and consolidate redundant offices.

At the same time, small companies that can move quickly may be able to capture the business of buyers who don't like dealing with megabrokerages.

"There are going to be fewer suppliers and channeling partners to distribute the products through," observed President Paul Springman of the National Assn. of Surplus Lines Offices Ltd. during an interview that preceded a panel discussion titled "Mergers & Acquisitions: Good for the Industry."

The panel was featured during the annual NAPSLO conference earlier this month in Orlando, Fla.

"When your top four reinsurance brokers become one, there's a difficulty," observed Edwin M. Millette, president of TIG Reinsurance Co. in Stamford, Conn.

Insurers that merge are likely to increase their net retentions and buy less reinsurance, he added.

"We're moving toward a world of a handful of insurance providers," he warned. "That won't satisfy client needs."

John K. Latham, president and chief executive officer of Colony Insurance Co. of Richmond, Va., compared the insurance industry consolidation with that of the banking industry.

"I think they provide a great role model for the insurance industry. We should do the opposite," he quipped. "They're moving farther and farther away from the customer."

In some cases, brokerage mergers and acquisitions may produce consolidation on the insurer side, limiting choices for insurance buyers, pointed out Mr. Latham.

Indeed, when stock prices reach a certain level, it's easier for companies to grow by acquisition rather than policy by policy, pointed out Simon Noonan, senior manager of financial services with KPMG Peat Marwick in Atlanta.

To maintain their competitive edge after an acquisition, newly merged companies will be forced to keep an eye on the bottom line, panelists pointed out.

In many cases, that will most likely mean staff cuts, predicts Mr. Latham.

"Personnel costs are the biggest component of expenses" for insurance companies and brokerages, he pointed out.

The merged companies also will likely invest the money saved by reducing staff size in technology so they don't lose efficiency, he predicted.

"You can only have so much overhead, so these companies will likely have to cut staff to pay for technology," he said.

Despite the urge to merge that seems to have taken over large industry operators, many companies that remain independent stand to benefit, the panelists said.

"There are a lot of independent agents who want to stay independent," pointed out Thomas Curtain, chairman of surplus lines brokerage firm Cooney, Rikard & Curtain Inc. in Birmingham, Ala.

Besides, "Aon isn't interested in small-town America," he added, pointing out that the majority of the acquisitions made by Chicago-based Aon Corp. have been large operations.

"Nimbleness can't always be duplicated in larger organizations," observed Mr. Latham. "A 300-pound ballerina doesn't dance all that well," he said.

In some cases, insurance buyers will turn to boutiques if they think the companies they had been doing business with will change as a result of a merger, suggested Mr. Millette.

When Munich Reinsurance Co. bought American Re Corp., many of the clients "went shopping" for new reinsurers, because many of them had chosen the companies based on their individual philosophies, he said.

Mr. Curtain predicts many of the clients of Johnson & Higgins and Marsh & McLennan Cos. will likely do the same because the two brokerages "have two very dissimilar cultures."

"Some clients won't like it, but they've got choices," he said. "There are other organizations they can go to."

Indeed, some surplus lines marketers attending last week's NAPSLO conference found that in many ways it resembled an employment fair.

"We look for producers who've been disenfranchised by the mergers," said Anthony T. Sidoni, president of The Walker Group, a surplus lines broker in Syracuse, N.Y.

In many cases, the decision of whether to stay with the newly merged organization or to go off on their own depends on the age of the producer,Mr. Sidoni said during an interview after the panel discussion.

"Those in their 50s or older may decide to stick around, while the younger ones in their 30s and 40s are more willing to open their own shops," he said.

"As a matter of fact, we're seeing that happen quite a bit," Mr. Sidoni said. "At the conference I ran into half a dozen broker/producers who have decided not to stay with the merged company and are going to go off on their own."

In order to compete with the powerhouses being created by merger and acquisition activity, the remaining independent insurance suppliers "will have to do something to differentiate themselves," Mr. Springman said during the interview with Business Insurance.

"The day of the generalist is over. And even if you're a generalist, you're going to have to do something different," he said.

"The entrepreneurial, innovative person who comes in early, stays late and keeps his nose to the grindstone will always do well," concurred Mr. Latham during the NAPSLO panel discussion.

"You can't just sit in the porch rocker reminiscing about the good old days," he said.

"You've got to get out of the box, look forward, not back" urged David L. Eslick, senior vp-sales and marketing in Cincinnati for USI Insurance Services Corp.

"Look at the early 1900s," he said. "Railroads controlled transportation, but they didn't know that. They thought they were in the railroad business. But if they had thought otherwise, they'd own the airlines today."

"Don't think you're just in the insurance business," he warned.

"If change bothers you, this is not your game," Mr. Curtain agreed.

Mr. Noonan of KPMG Peat Marwick moderated the panel.