Analysts Predict Surge in Insurance Company Mergers in 2006

January 4, 2006

Analysts are predicting that 2006 could be the big one in terms of new mergers by insurers. Not that 2005 was lean on mergers and acquisitions. Some of the top companies that made the move were 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.

Analysts are saying that with interest rates remaining low and corporations find more excess cash, 2006 could prove to be even more active than last year. Other motivators include an increasing demand for universal life and variable annuity products, and to some extent a global market that is just beginning to emerge.

“Most life insurance companies lack the critical mass to survive long term,” said Rob Haines, insurance analyst at CreditSights said in a CNN Money interview. “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.”

A.M. Best confirms that 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 malfunction, 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, there is a renewed interest, CNN reported.

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.

Senior Insurance Analyst at Fitch Ratings Julie Burke said the increased interest in products such as variable annuities with a guaranteed return and life insurance that doesn’t lapse will fuel the fires for more consolidation.

State regulators have impacted the picture as well by requiring companies to hold more capital in order to offer these products, according to Burke and other analysts. New guidelines could make it harder for smaller companies to meet stringent reserve requirements for these hot insurance and annuity products some analysts contend.
Companies that only dabble in the business may find it increasingly difficult to compete.

The financial industry will be a big player. According to Haines, “it’s likely banks will be spinning off (or selling) their insurance operations.”

Some of the key players in question include: JPMorgan Chase (Research) amid speculation that the nation’s No. 3 bank has put its own life insurance business on the auction block.; Property-casualty insurer Allstate (Research),the largest publicly traded auto and home insurance company, is also named as one that could either spin off or sell its underperforming Allstate Financial unit, which sells life insurance and annuities; and AmerUs Group (Research) and Protective Life Corp. (Research) are top candidates for acquisition.

As for potential acquirers, CNN reports that analysts are placing bets on Prudential (Research), which 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.

Growth overseas or more interest in the global market was also mentioned as a prime mover down the path of more consolidations.

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