S&P, Swiss Re Predict More Securitization, M&A’s in Life Market

January 9, 2006

It’s hard to get anything close to a consensus from financial analysts, but one forecast seems to be gaining almost universal credibility. The life sector is set for further consolidation in 2006. This appears to be the case in the U.S. (See IJ Website Jan. 4), and globally.

Whether or not this trend will spill over into the P/C insurance industry remains an open question, but, given the increasingly close ties between the two sectors, some influence seems likely. Most global insurers – Allianz, AXA, ING, Zurich, to name a few – have operations that cover both sectors, as well as substantial financial services businesses. It therefore seems likely, as many analysts have indicated, that the big boys will be looking to get bigger through acquisitions. It can be reasonably assumed that those acquisitions won’t be confined to life insurance.

Swiss Re’s new sigma study, concludes that “consolidation in the global life insurance market is set to accelerate in the coming years. Underlying this trend is an increase in the capital available to life insurers. Cost-cutting and thriving equity markets have strengthened life insurers’ balance sheets.”

On the same day Swiss Re came out with the study, Standard & Poor’s Ratings Services issued a report, “Updated Survey Of European Life Insurance Securitization”, which concludes that “the potential for further development of life insurance securitization is high in Europe and the number of transactions is expected to increase.”

Securitizing life portfolios by going to the capital markets, as Swiss Re has been doing recently, frees up additional capital for investments. This in turn facilitates the financing of acquisitions.

S&P credit analyst Jonathan Spry explained: “Securitization is increasingly being viewed as a useful tool for insurers dealing with greater regulatory capital needs and tighter definitions of eligible regulatory capital. A number of transactions have come to the market in recent years and we expect this asset class to grow further in the number, type, and sophistication of transactions in the years to come.”

Swiss Re’s study indicates that “changes in life insurers’ capital base, industry deregulation, globalization, demutualization and expansion of bancassurance have shaped the corporate landscape in the past decade,” and are likely to continue. The sigma study -“Getting together: globals take the lead in life insurance M&A -” concludes that “mergers and acquisitions in life insurance are going to increase sharply in the coming years.”

Swiss Re’s chief economist Thomas Hess commented: “Life insurers have strengthened their balance sheets and boosted their capital. This will spur consolidation in life insurance. However, M&A activity is unlikely to return in the near future to the levels seen in the late 1990s.”

The Swiss Re study is available on the Company’s Website at: www.swissre.com.

S&P’s study is available to subscribers of RatingsDirect, its Web-based credit analysis system, at www.ratingsdirect.com. The report can also be found on the S&P Web site at: www.standardandpoors.com.

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