Takeover-Minded Conglomerates Are Revolutionizing the Insurance Industry

Abstract

HE overconfidence and smugness displayed by many insurance companies during the 1950's changed to bewilderment during the early 1960's. The vastness of the changes which have taken place in this short period is difficult for many outsiders to appreciate. The first major development was a growing number of mergers among fire and casualty companies and acquisition of life companies by property and casualty insurance companies and vice versa. The acquisitions and mergers were an attempt to bail out some of the weaker companies by making better use of an admittedly limited supply of managerial skill and by effecting badly needed economies in operation. While a great many companies disappeared, these changes were accepted by the insurance fraternity without fear as it all happened, so to say, within the family, A second wave of consolidation started in 1965. Today most of the major property and casualty companies, as well as the bulk of the larger stock life insurance companies, have restructured their corporate form of organization to place their operating companies under holding company ownership. In conjunction with these moves steps were taken to acquire other subsidiaries in fields providing financial or other services related to the insurance business. These are sometimes called congeneric combinations. Strictly speaking, congeneric means belonging to the same genus, or allied in origin and nature. Still more recently, companies in unrelated fields have begun to acquire insurance companies. Since 1968 the conglomerate has become a major influence in the insurance business. Conglomerates are engaged in several nonrelated businesses and are not identified with one field or product. They were attracted to insurance, not by the nature of the business, but rather by their high asset values and the bargain price equities of many insurance companies. The fact that conglomerate stocks sold at very high price multiples helped in the acquisition of companies, particularly when the conglomerate could offer an exchange of a package of securities of the acquirer for the share of the acquired company. The conglomerate also had the advantage of tax deductibility on the interest of subordinated debentures which were exchanged for insurance company stock. Inasmuch as such interest could be paid out of the net investment income of the acquired insurance company, offers could easily be made which were very tempting to insurance company stockholders.