Insurance mergers could get hot
Analysts expect a flurry of deals that could set a record for the industry in 2006.
By Shaheen Pasha, staff writer

NEW YORK ( - The sleepy insurance industry could see a lot of action in 2006, as consolidation in the arena gains steam.

Last year brought some big mergers in the industry, notably MetLife (Research)'s $11.5 billion purchase of Citigroup (Research)'s Travelers Life & Annuity business as well as Lincoln National (Research)'s $7.5 billion acquisition of Jefferson-Pilot.

But analysts said 2006 should prove to be an even more active year for deals as interest rates remain low and corporations find themselves with more excess cash. Additional drivers include increasing demand for universal life and variable annuity products, as well as a largely untapped global market.

"Most life insurance companies lack the critical mass to survive long term," said Rob Haines, insurance analyst at CreditSights. "The sector is highly fragmented and rife with overcapacity. We do not see how most of the smaller players" can effectively compete and remain profitable in this environment.

According to insurance ratings firm A.M. Best, there are 1,262 rated life and health insurance companies in the United States today -- a huge number given the market environment.

But ever since the 2001 recession, with the stock market under pressure and regulators focused on corporate malfeasance, companies have been wary of making any deals.

Instead, life insurers became focused on turning around their own businesses and growing their stock prices. In the last year, however, as earnings growth improved, stock prices rebounded and companies began nibbling on deals.

In 2005, there were only 59 insurance company deals as of October with a total value of $39 billion, Haines said.

But in the current environment, merger activity could hit a record this year, surpassing the 190 transactions worth $82 billion recorded in 1998, he added.

Surge in demand

The surge in demand for products such as variable annuities with guaranteed returns, as well as life insurance that doesn't lapse will drive some consolidation, said Julie Burke, senior insurance analyst at Fitch Ratings.

New guidelines from state regulators that require companies to hold more capital in order to offer these products are another factor likely to spur more deals, Burke and other analysts said.

The new guidelines could make it harder for smaller companies to meet stringent reserve requirements for these hot insurance and annuity products.

"Given the pressure from ratings agencies and rising capital requirements, if you're going to participate in life insurance and annuities, you need to be a significant player," said Suneet Kamath, senior research analyst at Sanford C. Bernstein & Co.

Facing up to stiff competition

Companies that only dabble in the business may find it increasingly difficult to compete.

Analysts said the industry may see more financial institutions sell off their life insurance and annuities businesses to more established players, much like Citigroup's decision last year to sell its Traveler's unit to MetLife for $11.5 billion.

"A lot of people used to talk about the financial supermarket but it's clear that companies aren't getting rewarded for that model anymore," said CreditSights' Haines. "For the foreseeable future, it's likely banks will be spinning off (or selling) their insurance operations."

Who's buying and who's selling?

The market is paying particularly close attention to JPMorgan Chase (Research) amid speculation that the nation's No. 3 bank has put its own life insurance business on the auction block. A representative from JPMorgan declined to comment regarding a possible sale.

Property-casualty insurer Allstate (Research) is also attracting some attention as industry observers expect the largest publicly traded auto and home insurance to either spin off or sell its underperforming Allstate Financial unit, which sells life insurance and annuities, Haines said.

But as consolidation picks up, smaller life insurance companies will be the most likely targets, analysts said.

Haines said AmerUs Group (Research) and Protective Life Corp. (Research) are top candidates for acquisition. With market capitalizations of $2 billion and $3 billion, respectively, the companies are large enough to attract a potential buyer but still small enough to be digested by a larger corporation with relative ease, he said.

As for potential acquirers, analysts are placing bets on Prudential (Research). The company closed out 2005 with a healthy $3.5 billion in excess capital that could be used for an acquisition. Haines said a small to mid-sized acquisition could bolster the company's scale without too much risk. Principal Financial (Research) is also in a solid position to make acquisitions in the near-term, Haines added.

Growth overseas could also fuel the consolidation fever, analysts said.

"A lot of domestic-based companies have expanded internationally and there is a feeling that there are opportunities abroad," said Andrew Edelsberg, assistant vice president in the life and health group at A.M. Best.

He said the domestic market is moving towards sophisticated life insurance products that are related to retirement savings while internationally the focus remains on basic life insurance and annuity products -- creating more opportunity for life insurers to make strategic acquisitions.


Is Prudential a good bet for investors? Find out more here.

Merger activity overall should be red hot in 2006. Click here for that story. Top of page

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