Potential Wave of Mergers & Acquisitions in Global Insurance Industry's Future

Posted on Jun 15, 2011 by Sergio Ulloa (G+)

Insurance industry analysts have been anticipating a busy summer season of merger and acquisition activity amongst global insurers and reinsures, as a continued soft market in the wake of prolonged catastrophe losses prompts mid-sized companies to consolidate and gain scale to return sufficient capital for investors. The US$3.2 billion merger of equals between international reinsurers Transatlantic Holdings Inc. and Allied World Assurance Co, discussed earlier this week, has been accompanied by spate of smaller deals affecting the insurance industry around the world. Aetna Inc, the third-largest US health insurer, announced on Monday its plans to acquire Genworth Financial Inc's Medicare-supplement business for about US$290 million, to increase its coverage of the American retiree population. Medicare supplement insurance, sometimes referred to as 'Medigap' plans, offer coverage for deductibles, co-payments and other expenses not provided by Medicare, the universal US government health insurance system for elderly and disabled citizens. The market for supplementary Medicare coverage is expected to grow rapidly as the large 'baby boomer' generation of Americans approach age 65 and become eligible for Medicare. The demand for Medicare-supplement services offered by private insurers will increase as the burgeoning ranks of retirees have come to expect similar benefits to those they have enjoyed throughout their career. Through the acquisition of Genworth's subsidiary, Continental Life Insurance Co, Aetna will add an estimated 145,000 members to its existing base of Medicare supplement policyholders. The deal is expected to close in the fourth quarter this year with Genworth recording a gain of US$35 million tied to the sale. This move comes on the back of Indianapolis-based WellPoint Inc's similar acquisition of California Medicare Advantage plan provider CareMore for a reported US$800 million last week. Medicare Advantage plans offer a comprehensive private-run parallel version of Medicare. WellPoint also citied American demographic trends as a leading factor behind the deal, detailing that for every year until 2030, 1 million more baby boomers will become eligible for Medicare in states which Wellpoint operates its Blue Cross Blue Shield insurance schemes. North of the border, Royal & Sun Alliance Insurance Group PLC is purchasing Expert Travel Financial Services Inc., one of Canada's largest travel and health insurance distributors, in a strategic acquisition intended to create a better vertically integrated business model. Mike Wallace, SVP of Personal Specialty Insurance & Reinsurance at RSA, described the move as a necessary step forward for the company "This is an opportunity to grow in travel insurance by integrating distribution," he said, adding "This is part of our long-term strategy of consolidating the Canadian insurance industry, and I would say this is not the last one we'll do." RSA is one of Canada's largest property and casualty (p&c) insurers and in the top three among travel insurers, with US$1.9 billion in direct written premiums in 2010. The Canadian insurance industry has been subject to fervent trading activity, with recent moves including Intact Financial Corp's US$2.6-billion acquisition of AXA Canada to cement its spot as the largest property and casualty insurer in the country. Acquisitions have also enabled insurers to diversify their distribution platform and embrace new methods of interacting with clients. This week, Standard Life's employee benefits consultancy and technology provider Vebnet formally announced a tie-up with Vielife, the online health solutions and wellbeing consultancy acquired by CIGNA in 2006. Through this partnership, Vebnet declared that employers using the reward and flexible benefits platform could now provide their workforce with an additional service that lets employees measure and monitor their nutrition, stress, sleep and physical activity levels. The service is intended as a support mechanism for employees to maintain healthy lifestyle habits, decreasing potential sickness absences and keeping them engaged with their employer in a positive manner. Standard Life added that the deal would enable employers to identify specific health risks and would lead to more employees becoming engaged with the Vebnet platform. More complicated industry transactions could encounter other substantial impediments. The previously mentioned merger between Transatlantic Holdings and Allied World Assurance may have already hit a snag. A shareholder in Transatlantic that owns 24 percent of the company, Davis Selected Adivers L.P., has objected to the proposal, filing a statement with the Securities and Exchange Commission stating "serious concerns about the proposed transaction," and may encourage the company to explore more options before it commits to such an arrangement. The two companies have thus far declined to comment on this development. Under the proposed US$3.2 billion deal, Transatlantic's shareholders would wind up with around 58 percent of the new combined company and Allied World's stockholders with the remaining 42 percent. The main international credit rating and insurance information agencies have had a mixed response to the proposed merger, which would form a singular insurance and reinsurance entity with US$7 billion in shareholder equity. Standard & Poor's (S&P) put Allied World's financial strength ratings on credit watch with positive implications, saying it expected to raise the ratings by one notch (up from 'A') if the merger goes through as is. S&P left Transatlantic's financial strength ratings unchanged, because despite the noted strengths of the merger, S&P notes "it remains to be seen whether the combined entity will be able to outperform its peers." Moody's responded to the proposed merger by placing Allied World under review for a possible upgrade and also affirming the ratings of Transatlantic Re. "The rating agency believes the merger will provide both franchises with strong benefits," Moody's reported. AM Best left both companies 'A' financial strength ratings untouched but remained broadly positive on the deal. "The merged entity is expected to enjoy an enhanced business profile that will likely inure benefits in the form of an improved competitive position. The merged entity should also benefit from broader distribution channels, broader product diversity and the benefits of a significant global presence," the agency said in a statement. Companies Mentioned Allied World Assurance Allied World Assurance is a global insurance and reinsurance business. The company operates through a worldwide network of offices in several major US cities, Hong Kong, London, Singapore and Zug, Switzerland. Allied World Assurance provide property, casualty, insurance and specialty reinsurance products. Transatlantic Transatlantic Holdings Inc. is a leading international reinsurance company, headquartered in New York. Through it's subsidiaries, Transatlantic offers reinsurance capacity and analysis for a wide array of property and casualty products, with a particular concentration on specialty risks. Aetna Aetna international health insurance Aetna is a leading global diversified health care benefits company head-quartered in the U.S., serving approximately 35.8 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities and health care management services for Medicaid plans. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labour groups and expatriates. WellPoint WellPoint is the largest health benefits company in USA, with more than 33 million members in its affiliated health plans. As an independent licensee of the Blue Cross and Blue Shield Association, WellPoint serves members as the Blue Cross licensee for California; the Blue Cross and Blue Shield licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New Hampshire, New York, Ohio, Virginia, and Wisconsin. In a majority of these service areas, WellPoint does business as Anthem Blue Cross, Anthem Blue Cross Blue Shield or Empire Blue Cross Blue Shield. WellPoint also serves customers throughout the country as UniCare. RSA RSA has a proud heritage dating back almost 300 years. The current company structure was created in 1996 following the merger of two of the largest insurance companies in the UK, Royal Insurance and Sun Alliance. In 2008 the company shortened their name to RSA and simplified and refreshed their corporate brand. RSA has over 20 million customers worldwide. The Group currently manages GBP 14.3 billion of investments. RSA is a member of the FTSE4Good Index.