Insurance Sector Bailouts, Consolidation & Acquisitions

By Sustainable Virtual Copywriting Services

Many insurers and financial institutions looking to fund potential capital shortfalls by divesting non-core insurance businesses at attractive valuations, strategic buyers and sovereign wealth funds may be able to expand into new markets through acquisition, further supported by Deloitte's report;"The 2009 Insurance M&A http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_fsi_IN_2009%20Insurance%20MA%20Outlook_April%202009.pdf

"As we entered 2009, the primary challenge for some life and property and casualty (P&C) insurance companies had shifted from finding ways to deploy excess capital to raising new capital. While both the life and P&C segments have experienced investment write-downs, the life segment has been hit the hardest. The volatility in the financial markets caused more stress in the system particularly for those life insurance companies with guarantees on their variable annuities," said Rebecca Amoroso, head of Deloitte's U.S. Insurance practice. "As a result, many life and P&C firms are experiencing significant losses of capital as well as downturns to their ratings. In this environment, raising capital, divesting non-performing or capital-consuming businesses or seeking protection from better capitalized firms emerges as a priority.”

Currently there is an imbalance in supply and demand, with more companies seeking to divest than companies seeking to acquire. Chinese and Japanese companies with strong foreign currency positions, and those Bermuda and European insurers that avoided major investment losses, may be the strongest candidates to make acquisitions. Sovereign wealth funds may also seek to invest in insurance companies as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills. As financial and credit markets stabilize, we expect strategic buyers to re-enter the market, take advantage of the supply-demand imbalance and a new wave of consolidation to occur.

The insurance industry represents the next opportunity to refine the Treasury Dept.’s ever-evolving bailout formula. It is reported that Treasury is considering capital infusions in sinking insurers such as Prudential Financial, Hartford Financial, Genworth, Lincoln National, and possibly even the giant MetLife.

These TARP bailouts according to GAO’s report (June 2009 Status of Efforts to Address Transparency and Accountability Issues Report) supposedly will be much smaller than the $45 billion the government has given Citigroup and Bank of America – or the well over $180 billion that has gone into the black hole known as AIG. But if a few accept a couple billion dollars here or there could suddenly add up.

"We look forward to the official word from Treasury," said Whit Cornman, a spokesman for the American Council of Life Insurers.

As life insurers waited for months to learn whether they would get federal funds, many resorted to contortions to bolster capital. Hartford recently said it plans to infuse $20 million into a cash-strapped Florida thrift it agreed to purchase for $10 million to qualify for federal aid under TARP. Hartford has estimated that it would be eligible for $1.1 billion to $3.4 billion in funds if Treasury accepts its application.

Not all insurers have been openly struggling, and some retain triple-A ratings, including Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co. and TIAA-CREF.

Key Insurance Stocks to Watch
Genworth Financial Inc (GNW.N), Hartford Financial Services Group Inc (HIG.N), Lincoln National Corp (LNC.N), Prudential Financial Inc (PRU.N), MetLife Inc (MET.N), Progressive (PGR), WR Berkley (BER), AFLAC (AFL), Loews (LTR), Cincinnati Financial (CINF), American International Group (AIG), Selective Insurance Group (SIGI), Protective Life (PL), First American (FAF), Sun Life Financial (SLF) and Old Republic International (ORI).

The 10 key factors affecting insurance M&A includes:
Evolving M&A strategic objectives. Insurance companies should respond to M&A opportunities effectively and avoid an ad hoc execution approach.

Investment valuations and subprime exposures. Turbulent equity and credit markets have made it increasingly difficult to value insurance company investment portfolios. As a result, it is important for potential buyers to place increased emphasis on investment portfolio due diligence to help mitigate post-closing investment losses.

Capital challenges. Traditional capital management and deployment strategies will not have a significant impact on the historically high, industry-wide levels of excess capital. If the industry is to significantly reduce the historic cyclicality of the insurance business, it should consider finding better ways to access and subsequently redeploy capital.

Low valuations. Reflecting weaker balance sheets and lower reserve levels, the valuations of many P&C firms are trading at discounts to book value and, in some cases, at all-time lows.

Integration challenges. Strategic players are taking more of an "all or nothing" approach to integration, a departure from the "merger of equals" mentality that had historically dominated. Regulatory scrutiny has also increased. In this environment, companies may use M&A "clean teams" to speed up the merger process by enabling intended merger partners to share proprietary information while awaiting regulatory approval.

Changes in insurance company regulation. From an insurance M&A perspective, it is too soon to assess the potential implications of the proposed federal regulatory framework. The widespread perception that some change is likely suggests that participants in the insurance M&A arena consider potential regulatory changes when evaluating transactions.

Push for IFRS. A switch to IFRS would establish a globally accepted insurance accounting standard. It could also result in more consistent financial information and valuations.

Principles-based reserves. The National Association of Insurance Commissioners is expected to adopt the Principles-Based Approach to life reserve and capital requirements, which will require companies to "model all identifiable and material risks, benefits, and guarantees inherent to the product sold." If adopted, PBA will have a significant impact on the due diligence associated with M&A transactions by requiring companies to test and understand the reasonableness of the assumptions used in the models.

Fair value reserving. The underlying principle of fair value accounting is that an acquirer needs to evaluate loss-reserve obligations using valuation assumptions that are consistent with those used in a public market exchange. Two general approaches have emerged to determine the fair value of P&C loss reserves. The direct method involves discounting the expected value of loss reserves using a risk adjusted discount rate. The indirect method separately identifies the risk margin from the discount rate used in the fair value calculation.

Tax issues and legislation. As the tax-reform debate moves forward and specific proposals emerge, it will be important for potential acquirers to determine their best- and worst-case tax scenarios and prepare valuation models under these scenarios. Potential changes in the tax system and tax rates can have a significant impact on the after-tax cash flows and value of a deal.
Property-casualty firms, reflecting their weaker balance sheets and lower reserve levels, appear to be trading at discounts to book value and, in some cases, at all-time lows. Life companies are not faring better, as sizeable investment losses and ratings downgrades have besieged them. Expect accelerated M&A activity over the next 12 months within the fractured insurance industry paralling the health care M&A frenzy.

However, the insurance sector’s deep interests within the commercial real estate pending meltdown should make for an interesting year ahead as commercial real estate delinquencies rise, healthcare cost burdens are addressed, unemployment continues to rise and the deficit grows by trillions exponentially.

We witness yet another example, as most now fully recognize the competitive need for innovative new approaches such as cost effective collaborative models or virtual enterprises cutting workforce carbon footprints while capable of reducing expenses saving between 25% - 45% per average project and the desperate need for significant small business tax incentives designed to generate large numbers of middle class employment opportunities. The key lies in restructuring using sustainable business models built on innovative clean policies and lean cost saving enhancements that truly prepare the country to compete in the new global economy.

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