A Merger Here, A Combination There — So Goes the Insurance and Reinsurance Industry

The insurance and reinsurance industry has a cyclical history of consolidation and start-ups. While there are plenty of startups these days funded by private equity, hedge funds and pension funds, the consolidation trend has moved into overdrive. In just the past few weeks, blockbuster mergers have been announced between XL and Catlin to form XL Catlin, a play by XL to expand its specialty commercial insurance operations, and Partner Re and Axis to form what will be a top 5 reinsurance company. And these follow on the heels of Renaissance Re’s acquisition of Platinum Underwriters, a more modest, but significant reinsurance combination.

So what do all these combinations have to do with insurance and reinsurance disputes? Insurance and reinsurance companies often trade together. They may reinsure one another they may retrocede to each other. Insurance and reinsurance companies also have runoff operations, which add to these complicated and interwoven transactions. So when mergers occur, active disputes and active claims discussions may move from external issues to internal issues.

Some years ago, we represented a reinsurance company that had ongoing and active disputes with a cedent over workers’ compensation-related business. Negotiations over claims ensued and arbitrations were commenced. The matters were contentious. And then our client was sold to the parent of the cedent. The arbitrations were quickly terminated and internal, high level negotiations commenced to seek what then amounted to a balance sheet reconciliation.

Nevertheless, some time later we received a call from our in-house contact who asked our advice on positioning during these internal negotiations. It seems that the in-house lawyer for the parent company viewed the reinsurance contracts one way and our in-house contact had a very different view. We were asked to provide advice concerning how the reinsurance contract should be interpreted concerning the cession of the losses that were the core of the original dispute. We provided that advice, but doing so felt strange considering that the dispute was now internalized and would never go to arbitration.

Obviously, with a true merger, the two sides of the house are not going to arbitrate an internal dispute that existed prior to the merger. But that doesn’t mean that disputes won’t arise when losses have to be paid and reinsurance recoveries under valid reinsurance contracts are sought. Now I am not saying, and I have no information, that any of these current combinations will have internal disputes, but in-house counsel for all these parties should keep their eyes and ears open. Somewhere down the line XL may reinsure Catlin and Partner Re may be a retrocessionaire of Axis.

What we disputes lawyers know, unfortunately, is that when mergers happen sometimes two clients become one and disputes disappear. A good thing for the companies, but not so good for us lawyers.