M&A among insurers will heat up this year, study says

Mergers and acquisitions will heat up this year as insurers sell operations to bolster capital and strategic buyers look for expansion opportunities, according to a new study from Deloitte LLP. In the years leading up to last fall’s economic slide, market conditions encouraged carriers to grow organically. They entered 2008 with strong balance sheets and were in search of ways to deploy that capital, either by writing more business, raising dividends, buying back stock or making acquisitions, according to the report, “The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment.” Insurers are hurting from investments that have slumped in value, and their biggest worry is raising new capital to stave off ratings downgrades. New York-based Deloitte listed five situations in which merger activity tends to occur: after a catastrophe has left weakened balance sheets in its wake, at the beginning of a hard-pricing market, at the beginning of a weak pricing market when M&A is a way to pick up cheap assets, as a result of regulatory developments and when investment returns are low, according to the study. As insurers grapple with their own difficulties, lacking the cash to make attractive purchases, interested foreign buyers are likely to emerge, including Chinese and Japanese companies that are flush with foreign currency, as well as Bermudan and European carriers that managed to dodge large investment losses, according to Deloitte. Buyers are also taking on risk through acquisitions, though. They need to structure the deals without raising their exposure to investment portfolio losses. As a result, some buyers are trying to buy underwriting teams instead of the actual insurer, while other financial services companies seek a larger piece of the retirement market through a life or annuity company purchase, the study noted. Deloitte also pointed out 10 factors that will affect mergers in the insurance industry, including the difficulty behind placing a value on insurers’ investment portfolios, the recent push for principles-based reserving — which requires insurers to model risks benefits and guarantees inherent to the products they sell — and changes in insurance company regulation.