Liberty Mutual Group's deal to buy Safeco Corp. is a preview of a consolidation wave that will concentrate market share among the nation's top insurance carriers, experts say.
Within five to 10 years the top 10 property/casualty and life insurance carriers will control 60% of their respective markets, compared with no more than 40% now, said John Nigh, managing principal with the consulting firm Towers Perrin.
The top 50 underwriters are likely to control more than 90% of their markets, said Mr. Nigh, the Americas practice leader for mergers, acquisitions and restructuring Towers Perrin's Tillinghast business.
"I think fundamentally, we have too many companies," he said.
Bank-owned agencies probably would not suffer in such a shakeout and might even benefit, because they tend to be larger than many independent brokerages, analysts and agency executives said.
"Bigger carriers are going to want to do business with bigger agencies," said Daniel Cantara, executive vice president of commercial services at First Niagara Financial Group in Lockport, N.Y. "Scale will need scale."
Furthermore, mounting pressure on boutique brokerages could prompt them to accept buyouts from banks and other agencies, he said.
Scale is something that Liberty Mutual's $6.2 billion deal for Safeco, announced April 23 and set to close in the third quarter, would certainly create. Buying Safeco, of Seattle, would make Liberty Mutual, which is based in Boston, the nation's fifth-largest property and casualty insurer.
"That deal is just an indication that companies are going to consolidate for scale, diversification, product line and management strength," Mr. Nigh said.
The insurance market has softened. Weak demand from consumers and businesses is forcing premiums down and cutting into carriers' profits. And a mediocre investment climate is not helping their return on equity, said John Wepler, the president of Marsh, Berry & Co., an insurance consulting firm in Concord, Ohio.
Within a few years companies weakened by today's environment will face shareholder pressure to sell, Mr. Wepler said. Mr. Nigh said that when the economy starts to rebound, the more successful carriers are likely to start pouncing.
As the carriers combine, the executives with whom agencies are used to dealing may be replaced, and relationships will have to be rebuilt, said Scott Isaacson, executive vice president for Wells Fargo Insurance Services.
"Our challenge will be to build relationships with whomever the new regime might be," he said.
But big carriers' growing clout will not necessarily enable them to squeeze more revenue from large agencies, Mr. Isaacson said. The rivalry between even a handful of dominant carriers would be enough to limit the pricing power of each, he said.
"I think that competition in our industry is not going to go away in my lifetime," he said.
Mr. Wepler had a similar take. "I don't see any need for banks to run for the hills," he said. "The bigger challenge is driving growth in this soft market."
Big agencies in particular will be able to bargain for favorable commission schedules, said Mr. Cantara, who as the head of First Niagara's insurance businesses has seen that dynamic up close.
As the bank's insurance revenue rose — it is now $50 million a year — it has been able to win better commission schedules from even large carriers, Mr. Cantara said.
With big underwriters growing, regional carriers are likely to become a more important source of competition, serving as a bulwark against the skewing of commission arrangements in favor of the top carriers, executives and analysts said.
"You'll see a massive consolidation of big players, but also significant growth in the usage of regional insurance carriers," Mr. Wepler said. "I don't know that anyone will control market to the extent that they'll be able to just set rates."
Mr. Cantara said small agencies will be the most vulnerable in coming years — to both pricing leverage and greater demands for technology investment.
"Carriers already want to do much more business in an electronic format, and some smaller agencies won't be in a position to make that technology investment," he said.
That, in turn, may prompt them to sell themselves to banks and larger agencies, he said. Wells Fargo and First Niagara have been active agency buyers in recent years, and Mr. Cantara and Mr. Isaacson said their companies remain acquisition-minded.
