Mergers and acquisitions (M&A) are the name of the game in international insurance at present, with the $US28.3 billion ($37 billion) Ace-Chubb merger announced on Wednesday the biggest so far. But it’s almost certainly not the last significant merger this year.

The deal stitched together by Ace follows a string of high-profile mergers ranging across the industry, mainly in the northern hemisphere.

It kicked off last November with the $US1.9 billion ($2.5 billion) takeover of Platinum Re by fellow Bermuda reinsurer Renaissance Re. That was followed in January by Dublin-based XL announcing the purchase of Bermuda-based Catlin for $US4.1 billion ($5.4 billion). 

The following month UK insurer Brit was bought by Canada’s Fairfax Capital for $US1.8 billion ($2.3 billion).

Specialty insurer Endurance bought fellow Bermudian Montpelier Re, also for $US1.8 billion, in March.

On June 10 Tokio Marine announced the purchase of US specialty insurer HCC for $US7.5 billion ($9.89 billion), and last Tuesday global broker Willis revealed its intention to merge with services specialist Towers Watson for $US18 billion ($23.4 billion).

The next day came the Ace-Chubb bombshell.

Sitting in a financial and legal limbo – and with a lot more drama to happen before it is settled – is the mooted $US13 billion ($17.04 billion) merger between Axis Capital and PartnerRe, which is being stymied by determined European investment giant Exor.

Each merger/takeover has been marked by its own special circumstances. Tokio Marine, for example, is seeking alternative sources of income as the Japanese domestic market continues to flatline.

But the deals have been done with an over-riding imperative – the time is right to merge and grow.

Global insurers and reinsurers are experiencing low investment returns and depressed premiums. Yet claims reserves are high, because the northern hemisphere is experiencing what insurers always euphemistically refer to as a benign claims environment in the bellwether North Atlantic hurricane market.

The winds haven’t blown hard for two seasons and other catastrophe claims are low.

To see how tough the global investment market is, insurers need look no further than what’s happening in reinsurance. Aon Benfield says the amount of alternative capital from pension funds and hedge funds that flowed into reinsurance last year grew 28% to $US64 billion ($84.4 billion) out of total reinsurer capital of $US575 billion ($758.5 billion).

The funds are putting their money in reinsurance because safe investment options that make a decent return are scarce at present. The profits from reinsurance are at least consistent, and pension funds in particular place great value on consistency.

Insurers are therefore in the same boat as every other investor. Faced with few opportunities to grow their capital through normal investments, they may as well invest in themselves and their competitors through M&A.

It makes sense. When it comes to doing more business more cheaply, size really does matter.

So what are the M&A opportunities? Analysts in the UK predict smaller Lloyd’s and Bermuda operators such as Amlin, Beazley, Hiscox, Lancashire and Novae could be exposed to M&A pressure, with their returns on equity falling slowly but consistently over the past three years. Analysts also pinpoint troubled insurer RSA as a possible UK takeover target.

US industry reports out of New York suggest smaller specialty insurers such as WR Berkley and Arch may find themselves in the sights of giant competitors such as Travelers and AIG. Nor will mid-size players be safe if their figures look good.

The Ace-Chubb merger, which will see the Chubb brand retained for the overall operation, is therefore being hailed as a marriage made in investment heaven. Chubb has always been highly regarded in the US market, and the added heft of Ace will make the merged company a global heavyweight.

In a note to staff, Ace CEO Evan Greenberg – son of the great insurance empire-builder Maurice “Hank” Greenberg of AIG – says the merger with Chubb “will create a global property and casualty powerhouse with highly complementary business lines, distribution channels, customer segments and underwriting skills”.

“In the US, where Chubb has a substantial presence, the combination makes us a leading insurer of business, from the large corporate segment to the middle market, with a broad variety of coverages,” he says.

“Together we become the second-largest commercial insurer in the US. 

“Internationally, where Ace is a truly global insurer with extensive presence in 54 countries, Chubb’s operations in 25 markets will add to our presence and capabilities and position us to better pursue important market opportunities globally. 

“The combined company will be a top-tier leader in a number of global specialty and traditional products such as professional lines, risk management, workers’ compensation, accident and health and other property and general casualty lines.

“We will take advantage of each other’s strengths and emerge stronger together, with much greater earning power than the sum of the two companies separately.”

That’s clear enough, but not all mergers are such sweet propositions.

Analysts predict Willis will have some difficulty convincing Towers Watson shareholders to sell under the present arrangement, which would see Willis hold 50.1% of the combined company and Towers Watson 49.9%.

In market capitalisation terms, Willis is smaller than Towers Watson. But the special $US125.13 ($165.24) cash dividend being offered to sweeten the deal for Towers Watson shareholders is actually below the $US137.98 ($182.17) closing price of Towers Watson stock on the day before the deal was announced.

However, the figures of the combined operation are compelling. The projection for Willis Towers Watson envisages a professional services behemoth with 39,000 employees across 120 countries and annual revenue of more than $US8.2 billion ($10.8 billion).

The savings would be in the region of $US100-$US150 million ($131.9-$197.9 million) a year, which illustrates the fact that greater size can open up new opportunities to do more for less.

In the present investment environment, scale and the economies it brings mean greater profits. That’s the combination investors everywhere are looking for, and which insurers are aiming to provide.