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Bankers: Insurance M&A market headed for tough 2011
December, 08th 2010

Investment bankers expect another tough year for insurance sector deals in 2011, although there is hope for the M&A market as insurers come under increasing pressure to show growth coming out of the financial crisis.

Large strategic insurance mergers, if any, may be one-off events in the coming year and a big wave of deals is not likely, bankers said at a panel discussion at the SNL Insurance M&A Symposium on Tuesday.

Deals in the life insurance sector will be driven by companies trying to redeploy capital to improve return on equity, save costs, focus on core operations and get out of what they don't do so well, they said.

In property-casualty, challenges around pricing that have made for a tough environment will drive more normalized M&A, the bankers said. However, the cost savings in that side of the business tend to be harder to find.

"There is going to be activity, but we are going to have to work hard for it," said Thomas Stoddard, senior managing director at Blackstone Group. "We may not actually have a whole lot to show for it."

Peter Babej, Citigroup's global co-head of financial institutions, added, "Domestically things are going to be pretty rough and spotty."

The insurance sector has seen a large drop in the number of deals over the financial crisis. So far this year, deals worth $78.1 billion have been struck worldwide, boosted by some large transactions like MetLife Inc's $16.2 billion purchase of American International Group Inc's foreign life unit, Alico, according to Thomson Reuters data.

But the volume is still lower than the $88.3 billion reached in 2007, and it's much smaller in terms of the number of transactions. The data shows 559 deals have been struck so far this year, compared with 802 in all of 2007.

"It's that first step of M&A, which is, 'OK. Let me do triage. Let me get out of what I am not good at,'" said Richard Bonaventura, Barclays Capital's co-head of financial institutions M&A.

Another challenge for consolidation in the US insurance sector is finding buyers, bankers said.

In life insurance, for instance, large US companies are looking abroad, like in emerging markets, for growth. Others like Canadians are also looking outside the United States, while Europeans have to contend with new regulation, which may keep them out, the bankers said.

Insurers out of China will eventually look for acquisitions in the United States and Western Europe, but for now politics and lack of expertise in these markets is likely to hold them back, the bankers said.

They may instead look for minority investments or small acquisitions for now.

"We are really looking here at tactical things," Bonaventura said. "Last year shareholders were perfectly happy for you to have a low ROE and a stronger balance sheet. But now they are looking at the CEOs and CFOs and saying, 'What have you done for me lately? Where is my growth?'"

 
 
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