Summary
If thorough due diligence work is performed, investors could benefit from consolidation due to the benefits of diversification. A combination of companies focusing on different lines would either free up capital for other purposes or lead to a financially stronger company due to the benefits of diversification. However, this works only if legacy issues have been dealt with and both players really have core competencies to contribute to the combined enterprise. However, mergers or acquisitions implemented without adequate due diligence efforts could lead to reductions in ratings, which has happened in a substantial portion of combinations implemented in the past.
Analysis
For example, if reinsurers with Property Catastrophe and Casualty expertise combine, less capital would be needed to support the combined entity than the sum of the capital needed to support the two companies. However, this works only if the legacy issues have been dealt with successfully and both players have demonstrated their core competencies. This could be established by independent actuaries and underwriters performing thorough reviews in advance of any merger or acquisition. These reviews could also assess whether the corporate cultures are compatible so key people are retained.
