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Industry Consolidation: Whos Next?

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While life insurance analysts ponder the long-term implications of the MetLife-Travelers marriage announced earlier this month, the question for many people is, whats next?

John Nigh, insurance mergers and acquisition specialist for Tillinghast, says the primary motivation in the next round of consolidation will come from medium-sized companies who realize they dont have the scale needed to make the necessary investments in technology “or more broadly speaking, to compete on a qualitative basis.

“I would say they will be the proactive partners in these transactions in that they will be seeking to be taken over,” Nigh says.

But he does not rule out mergers of equals.

“In fact, there are three medium-sized companies now who are engaged in merger talks,” Nigh says, but declining to get specific.

Late last year UBS put out a research report which indicated that the companies most often mentioned in any discussion of possible takeover targetsNationwide, Lincoln and Jefferson-Pilotwould instead be more likely to join together in a merger of equals in some combination for various reasons.

For example, according to the UBS report: Greensboro, N.C.-based Jefferson-Pilots high valuation and its management preference for independence would seem to preclude a takeover; Philadelphia-based Lincolns strength in the upscale individual life and variable annuities market appears redundant with the operations of the potential global acquirers such as AIG or Manulife; and Columbus, Ohio-based Nationwide Financial Services mutual company parentage could be a stumbling block.

Media representatives for all three companies declined to comment on any possible merger talks.

And dont look for any overseas giants to repeat the 1990s trend of grabbing U.S. life operations. “We do not expect any near-term life blockbuster deals with U.S.-domiciled companies as targets,” the UBS report states.

The Europeans have not viewed the acquisition wave of the 90s that put Transamerica, ReliaStar and Aetnas life operations under the ownership of Aegon and ING as a success, according to the report. U.S. operations of other companies such as Allianz and Zurich have either been divested or scaled back, the report notes.

And what of those life insurance operations that are not core to their owners strategic vision?

In fact, Fitch Ratings recently downgraded Allstate Life Insurance Company using just such logic.

Fitch ratings analyst Bruce Cox says the recent growing acceptance in the capital markets for life insurance company divestitures by organizations whose main focus is not life insurance bodes ill for primarily property-casualty entities such as the Chicago-area-based Allstate holding on to its life units.

“We believe that the life insurance industry consolidation will continue as insurers seek the scale needed to operate in an increasingly challenging competitive environment,” Cox says. “Thus, we are less comfortable than previously that Allstate Life will remain a permanent part of the Allstate enterprise.”

But he stresses the agency had no particular knowledge of any such divestiture plan in the works.

Safecos move last year to divest its life operation underscores such a thesis.

Questions also have been raised about the ability of banking and insurance underwriting entities to function as one smooth cross-selling machine. Here it all comes down to just how integrated the two businesses are.

Standard & Poors analyst Tanya Azarchs notes that the Citigroup divestiture of Travelers L&A was not prompted by any specific problems in the insurance operation. In the same vein, Fortis spun off its own insurance operation even though it was profitable because it had very little connection to the companys core business. “Bancassurance has been much more successful in Europe in those instances where there has been an integrated approach to selling banking and insurance products,” she says.

Azarchs also notes that Citigroups retention of its Primerica and National Bank of Mexico units bears this out. “Primerica is more integrated in the group, with a sales force that sells other products,” she says. “Banamex has also had a more integrated approach to selling insurance products through the branches.”

The UBS report also notes that regulatory changes of the past few years would make a repeat of the 90s challenging. For North American companies, purchase accountingmuch less advantageous to the buyeris now the norm, having replaced pooling methods.

“Since the global equity market collapse of the early 21st century, regulators in many developed markets [including the U.S., U.K. E.U. and Canada] have made solvency capital requirements for insurers more onerous,” the report states. “Higher capital requirements mean lower ROEs, and ROEs are a key predictor of transaction multiples for insurers, even in the private market.”

With the U.S. market approaching slow-growth maturity, Asia now has emerged as one of the biggest magnets of global insurance capital. “Winners are likely to be established players who know the culture and have management strength and depth in the region, including AXA, AIG, Manulife and Prudential plc,” the UBS report states. “Although increasing opportunity in Asia may be inevitable, we do not expect it to outweigh the long-term opportunity for growth.”

Reproduced from National Underwriter Edition, February 18, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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