Cash hoards could spur life insurance M&A, analyst says

While life insurers continue to cling to their cash, a boom in mergers and acquisitions may be just around the corner, according to an analyst with Moody’s Investors Service Inc.
“It’s a matter of price, but we could see more acquisitions of life insurance companies’ blocks of business,” said Marc Abusch, an associate analyst with Moody’s.
As of the second quarter, life insurers held roughly $115 billion in cash and other short-term investments at the operating company level, said Mr. Abusch, the author of a research report on life insurers which was published this week. That’s equal to 3.5% of total invested assets, up from 3% in the first quarter but still below the 5% level at the end of 2008.
Insurers scrambled to build up their cash reserves during the financial crisis, and continue to hoard the money amid low interest rates.
“With rates this low, it’s hard to put the money to use,” Mr. Abusch said. “Opportunistically, they might find an acquisition of some block or a business they feel is more in line with their strategy, and they may pursue it.”
Mr. Abusch said insurers are in a tough situation: Sitting on cash could hurt carriers’ profits in the near term, but by investing now, insurers would lock in low interest rates, and profitability would still fall because products’ pricing hasn’t been adapted for a low-interest-rate environment.
Then again, insurers may be building up cash to cover liabilities tied to their products; carriers need to invest in long-term instruments in order to meet the liabilities tied to the products they offer. Carriers may be waiting for the right time to invest the money rather than looking to use the cash for acquisitions, Mr. Abusch said.