Companies should be wary of merging where there is no strategic rationale and no synergies regardless of competitive pressures in the industry that will force companies to consider consolidation, according to Constantine Iordanou, chief executive of Arch Capital.
Iordanou was speaking at the Standard & Poor's Ratings Services' 30th Annual Insurance Conference this week.
He recalled that back in the 1980s there were roughly 150 reinsurers worldwide, and consolidation in the late 1990s "helped the business." Today, he believes that "further consolidation will improve the environment," but with a few caveats.
Companies shouldn't merge if there's "no strategic rationale and no synergies" he explained, and different companies obviously have different internal cultures that may not mix. "If the culture isn't compatible, you're looking for a disaster."
But overall, he said, mergers will happen "because some companies have become too small." He added: "good size and financial strength ratings give you opportunities to see what is out there. Then you differentiate yourself based on capabilities."
Iordanou explained that even with pricing down 10 percent-15 percent, the "underlying business is still healthy." Still, he said, based on the industry's current dynamics, "you create this frenzy of competition, and in my 38 years in the business, it usually doesn't end very well. One person's little aggression turns into the next person's bigger aggression. To tell you the truth, I don't know the end of it. There's no indication of prices stabilising."