Insurance Mergers and Acquisitions

The insurance industry of late has witnessed some path-breaking changes which have left an indelible mark. This trend of rapid transformation is likely to continue as regulatory, socio-economic and technological forces keep influencing the way in which business is done. These changes have also given rise to a wave of insurance mergers and acquisitions in the last five years. External forces like globalization of the market place, industry convergence and deregulation fuelled consolidation in the insurance industry during the years 1998 to 2000. Also, the passage of the Gramm-Leach-Bliley Act in the US encouraged large European insurance companies to enter the US market.

In the years 2001 and 2002, insurance mergers and acquisitions took a plunge. The stock market crash, the terrorist attack on the World Trade Center and low interest rates wiped out the capital of insurers. Also, European companies realized the folly of earlier insurance mergers and acquisitions stemming out of cultural differences and lack of operational synergy.

 With new capital flowing from improved investment returns and strong underwriting income, insurers showed inclination towards consolidation. The year 2003 saw a big increase in insurance mergers and acquisitions activities compared with the two previous years. The acquisition of WellPoint Health Network Inc by Anthem Inc for a deal value of USD16.2 billion was the largest US merger and acquisition in 2003.

There are three main insurance areas

• United States
• Europe
• Japan

Each of the areas has had different priorities and strategies over the last five years.

After two years of a dull market, the US saw a spurt in mergers and acquisitions in 2003. The deals were mostly domestic mergers and within segments. Most deals focused on acquiring books of business and improving distribution opportunities. The highly fragmented US insurance market was one of the major factors driving mergers. According to the Insurance Department Resource Report, there were 1506 life/health insurance companies and 3,163 non-life insurance companies in 2001. The only way to reduce competition and increase market share in the mature market was to make acquisitions. In 2003, the number of announced deals increased to 103 from 87 in 2002

European insurers are still struggling to meet capital requirements. In the year 2000, European life insurers invested 30 to 40 percent of their portfolios in equity markets and some UK insurers invested as much as 80 percent. Most US companies limited their equity allocations to around 20 percent, cramped by their strict insurance regulations and capital requirements. This in a way helped, as the collapse of equity value in 2001 and 2002 devastated the balance sheet of life insurers who had invested major portion of their assets in equity markets.

Unlike the US and Europe, the Asian insurance industry is very concentrated. Japan, the second largest insurance market in the world, has only a few companies. Though foreign players represent only five percent of the Japanese market, the competition from outsiders is forcing the domestic players to further consolidate. A decade of poor performance of the life and non-life insurance industry wiped out the capital of domestic players.

Outlook for Insurance Mergers and Acquisitions

The World insurance industry is currently in the midst of significant transition. This transition is taking different forms in life and non-life sector and is being driven by different forces in each sector. Insurance mergers and acquisitions, which slowed down around 2000, are now on the rebound. The converse to the recent consolidations is specialization. Due to the failure of earlier mergers, many insurers are increasingly focusing on their core business and seeking synergies in partners.

The recent mega-mergers in the US property and casualty industry are going to force more insurance mergers and acquisitions among other players. However, the failure of many insurance deals in the past has made acquirers cautious. The new wave in consolidation that global insurance companies picked up in 2003 gave a different perspective for merger and acquisition and this trend is likely to continue.

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