Wednesday, March 22, 2006

More Deals Seen as Insurers Seek to Expand Markets

  
Reuters, Simon Challis and Ed Leefeldt, 22 March 2006

More insurance takeover bids are likely in the wake of British insurer Aviva Plc's 17 billion pound offer for Britain's Prudential Plc, as companies jockey for position, but analysts are skeptical of a merger-and-acquisition spree.

Although Prudential has rebuffed Aviva's approach, the news, along with recent reports of early takeover talks between St Paul Travelers Cos. Inc and Zurich Financial Services AG, has sparked a frenzy of bid excitement in the sector.

"Where there is this much smoke, there is some fire," said Donald Light, an insurance analyst with Celent LLC. "I think there is big money in play out there."

France's Axa has said it is open to doing a major transaction, while in the United States, Light sees MetLife Inc. and American International Group Inc.as potential buyers.

More takeover talks could be in the offing as insurers look to increase their financial muscle and expand into new markets or countries, analysts argue.

The industry saw merger-and-acquisition momentum develop late last year when Swiss Re agreed to buy General Electric Co.'s reinsurance units for $7.6 billion, and London-based Old Mutual Plc won control of Sweden's Skandia Insurance Co. in a $6.8 billion cash-and-stock hostile takeover.

Analysts have predicted that the pace of consolidation may quicken this year as insurers have rebuilt their balance sheets after the World Trade Center disaster as well as the bear market that ended in 2003.

Strong operating conditions in both life and non-life insurance means companies are generating surplus cash that could go into war chests for acquisitions.

"Surplus capital is growing at 5 percent among property casualty insurers, while premium growth is only 1 percent," said Stephan Christiansen, director of research with Conning Research & Consulting Inc. "That puts pressure on companies to use that money."

In February, Hartford Financial Group Inc. Chief Executive Ramani Ayer said he expected to have excess capital of $1.5 billion by 2006 that he could use for acquisitions or other purposes. Canada's Manulife Financial Corp. has said it has $3 billion available for possible purchases.

Worries among top-ranking European insurers that a deal between rivals could drop them down the rankings has spurred a number to begin tentative bid talks with rivals, bankers say.

But analysts have indicated that shareholders remain wary of giving the go-ahead for big deals unless there is a clear logic behind them.

"We continue to believe that M&A activity, though potentially increased, will continue generally to be disciplined and focused, fulfilling hard economic as well as strategically sound criteria," said the European insurance team at specialist investment bank Fox-Pitt, Kelton in a note.

The bid by Aviva, Britain's biggest insurer, for rival Prudential is widely regarded as have a strong strategic logic. Aviva looks for Prudential to bring it thriving and fast-growing businesses in Asia and the United States, where it lacks presence.

In the same way, Bermuda insurers, hit hard by the hurricanes, may look to acquire Lloyd's of London insurers in an attempt to diversify their business and to limit their losses from future disasters.

Other Bermuda-based firms may be open to a takeover, said Peter Streit, an analyst with Williams Capital. "Their monoline (single insurance) strategy didn't hold up as well as a global multiline company," Streit said.

For life companies, mergers will be dictated by economies of scale, said Mark Rouck, an analyst with Fitch Ratings.

"The cost savings when you put two of these companies together may be substantial," said James Ellman of Seacliff Capital, a hedge fund. "But it ultimately comes down to when these companies want to sell."
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The Economist, 21 March 2006

Aviva has offered £17 billion to buy Prudential, a rival British insurer. A successful deal would create a domestic champion to rival Europe’s biggest insurers. But Prudential may prefer to wait for a better offer from abroad, as the industry braces for a new wave of mergers

PROPONENTS of free markets shudder at the mention of creating “national champions”. Of late, European governments have promoted economic nationalism by favouring mergers between domestic firms to exclude foreign competition. Yet the urge to build a national champion is one reason proffered by Richard Harvey, the boss of Aviva, Britain’s biggest insurer, to explain his firm’s all-share offer for Prudential, a home rival. The deal is worth some £17 billion ($29.9 billion). Luckily, commercial instinct not political meddling is the driving force behind this and other potential tie-ups among the world’s insurers.

A successful deal would create the world’s fourth-largest insurer by market capitalisation and has a “compelling strategic, financial and operational logic” says Mr Harvey. But Prudential is not convinced. On March 18th, the smaller firm turned down Aviva’s bid as not in the interests of its shareholders. Aviva hopes the shareholders will disagree and push Prudential’s board to the negotiating table to consider the current offer. Another option would be a hostile bid, appealing directly to the shareholders without the approval of Prudential’s board, but Aviva have ruled that out for now. Failing that, a higher bid may be needed.

Business looks bright for the two companies, so Prudential can afford to be choosy. Both made healthy profits last year, delivering much improved performances compared with the previous 12-month period. But forming a bigger company could make sense too. Consolidation is gathering pace across the industry worldwide, so combining the two could provide the scale and international reach to allow competition with big international insurers. The combined market captialisation of Aviva and Prudential would put it on a par with Europe’s insurance giants: AXA, of France, and Allianz, of Germany.

Even if Aviva is unsuccessful, its approach to Prudential could yet flush out other offers for Britain’s second-biggest insurance firm. AXA has long had its eye on Prudential. AIG, the American insurance giant, is also touted as a potential suitor despite its recent travails. So too is Prudential Financial, an American insurer that is not (yet) connected with its British namesake.

There are whispers of mergers throughout the insurance industry. Standard Life, a medium-sized British insurance company, is also talked of as a likely takeover target. Rumours have flourished for years of a tie-up between AXA and Generali, Italy’s biggest insurer. A transatlantic merger of some sort is widely expected. Recent reports suggested that St Paul Travelers, another huge American insurer, had held tentative merger talks with Switzerland’s Zurich Financial Services. The American firm has since denied making any such overtures.

The latest flurry of activity in the industry comes after some sizeable deals at the end of last year. In September Allianz paid €5.7 billion ($6.9 billion) to take full control of one of Italy’s biggest insurance firms. In November, Swiss Re paid $6.8 billion for GE Insurance Solutions, the reinsurance business of the giant American industrial and financial conglomerate. Another deal begun last year, the acquisition of Sweden’s Skandia by Old Mutual, a South African insurer, is close to completion.

Insurance companies are generally bullish after several lean years. Insurers make money from premiums and investing to raise funds to pay for future claims. For a time sluggish stockmarkets hampered profitability but these have looked a lot more buoyant recently. And new European regulations on capital levels favour insurers that are big and diverse.

A combination of Aviva and Prudential seems a good fit. Knitting together two British-based firms would avoid complications that inevitably accompany a cross-border takeover. There is not much overlap between the two companies’ operations in Britain, where the insurance business is growing slowly. Insurers are keenest to expand in booming markets elsewhere, especially in developing countries, and here the firms are well placed too. Aviva is strong in Europe whereas Prudential has operations both in America and the fast-growing markets of China and India. Aviva’s general-insurance arm is generating healthy returns which could provide funds to bolster expansion in America and in Asia.

Prudential’s life insurance business has not provided such rich pickings. In 2004 the firm was forced to raise £1 billion through a rights issue to fund expansion of its UK business and comply with EU funding requirements. But its shares are soaring now. Speculation mounted over the weekend that Aviva would improve its offer despite its protestations to the contrary. Another suitor from Europe or America could also dive in with a higher cash bid which Prudential will find harder to resist. Either way, the insurance business looks set for another round of consolidation. And this time global champions, not just national champions, may emerge at the end.

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