told yesterday. Hiring people rather than financial acquisition was seen as better. David Fox reports.

The 12th International Reinsurance Congress Two thirds of mergers and acquisitions in the reinsurance industry will fail to achieve their objectives, the 12th International Reinsurance Congress was told yesterday.

Zurich Re (North America) Inc. senior vice president, Paul Braithwaite, said poor planning, incompatible information technology and disparate cultures would be their downfall.

The three-day conference with more than 200 delegates was opened yesterday afternoon by Premier Pamela Gordon. It ends on Friday.

Mr. Braithwaite, an actuary by training, said that while consolidation was having a profound effect on the reinsurance industry, many mergers would fail to yield the anticipated benefits.

The trend towards concentration drove the number of US reinsurers down from 125 in 1989 to just 54 last year. Business and strategy reasons for the trend include the growth and abundance of capital in the industry.

He has counted 45 consolidation deals in the last five years, with more expected before the end of the year. And these exclude a number of companies that went out of business.

"In 1984,'' he noted, "the top four reinsurers controlled 22 percent of the global reinsurance market. That was a very non-concentrated industry. By 1996, the top four controlled almost twice that share, 41 percent, which is still a very healthy level of concentration and competition, but quite a significant change.'' He said if one bought a reinsurer -- but could not keep the people who developed the leading edge technology or those with strong client contacts -- one failed to acquire the desired franchise.

"You would be better off just hiring that group of people and not bother going through the trouble of a financial acquisition,'' he surmised.

"Information technology systems are increasingly complex and very difficult to merge. In my experience, whatever you do with them, it always costs more than you expect.

"And trying to merge two disparate cultures is virtually impossible.'' He said the pace of consolidations would slow. In an industry still over-capitalised, companies would still need to grow.

But he observed, "It is the reinsurers who add value that will continue to thrive. Reinsurers in the marketplace today are becoming more and more distinguished by those who really understand risk and really provide value to their clients, versus those that are just providing financial capacity.

"It is my belief that the separation will widen; the ones that truly provide value will continue to grow and prosper and the others will at some point fall by the wayside.'' Mergers and acquisitions occur because companies find it difficult to grow organically. As a mature industry, reinsurance won't grow as fast as the economy. But investors want to see a larger growth in earnings than the environment affords. So some companies see acquisition as the only way to grow to keep owners happy.

Globalisation is a second reason for consolidation. Companies see the acquisition of a different company in a different location as a good way to access new developing markets. A third reason is customers are demanding larger, more highly capitalised reinsurers.

"Ten to 15 years ago,'' Mr. Braithwaite recalled, "it was not uncommon for a ceding company with $500 million or a billion dollars in capital and surplus to reinsure their risks with a reinsurance company that had only $50 million in capital and surplus.

"This didn't really make a lot of sense. But due to pressures from rating agencies, due to insolvencies and due to people thinking a lot more about credit risk, this has changed.

Warning over merger mania "The bar has been raised to $100 million and then $200 million. Today, it is probably in the vicinity of $500 million in required capital and surplus for a reinsurer to access the market very broadly.

"Who knows where it will be a year or two from now. But we know that this is no longer the place for small reinsurance companies.'' A fourth reason for consolidation is expense ratios. He suggested an expectation that expense ratios would have been reduced over the years through the rash of consolidations. But the expense ratios, in fact, have gone up.

PRIME MOMENT -- Premier Pamela Gordon shares a light moment with congress chairmen, PriceWaterhouseCoopers US partner John Bailey (left) and Bermuda partner Ray Medeiros just moments before opening the 12th International Reinsurance Congress yesterday at the Hamilton Princess Hotel. The conference is held in Bermuda annually by Hawksmere plc in association with PriceWaterhouseCoopers.

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