Industry Consolidation: Whos Next?

In fact, Fitch Ratings recently downgraded Allstate Life Insurance Company using just such logic.

Fitch ratings analyst Bruce Cox says the recent growing acceptance in the capital markets for life insurance company divestitures by organizations whose main focus is not life insurance bodes ill for primarily property-casualty entities such as the Chicago-area-based Allstate holding on to its life units.

"We believe that the life insurance industry consolidation will continue as insurers seek the scale needed to operate in an increasingly challenging competitive environment," Cox says. "Thus, we are less comfortable than previously that Allstate Life will remain a permanent part of the Allstate enterprise."

But he stresses the agency had no particular knowledge of any such divestiture plan in the works.

Safecos move last year to divest its life operation underscores such a thesis.

Questions also have been raised about the ability of banking and insurance underwriting entities to function as one smooth cross-selling machine. Here it all comes down to just how integrated the two businesses are.

Standard & Poors analyst Tanya Azarchs notes that the Citigroup divestiture of Travelers L&A was not prompted by any specific problems in the insurance operation. In the same vein, Fortis spun off its own insurance operation even though it was profitable because it had very little connection to the companys core business. "Bancassurance has been much more successful in Europe in those instances where there has been an integrated approach to selling banking and insurance products," she says.

Azarchs also notes that Citigroups retention of its Primerica and National Bank of Mexico units bears this out. "Primerica is more integrated in the group, with a sales force that sells other products," she says. "Banamex has also had a more integrated approach to selling insurance products through the branches."

The UBS report also notes that regulatory changes of the past few years would make a repeat of the 90s challenging. For North American companies, purchase accountingmuch less advantageous to the buyeris now the norm, having replaced pooling methods.

"Since the global equity market collapse of the early 21^st century, regulators in many developed markets [including the U.S., U.K. E.U. and Canada] have made solvency capital requirements for insurers more onerous," the report states. "Higher capital requirements mean lower ROEs, and ROEs are a key predictor of transaction multiples for insurers, even in the private market."

With the U.S. market approaching slow-growth maturity, Asia now has emerged as one of the biggest magnets of global insurance capital. "Winners are likely to be established players who know the culture and have management strength and depth in the region, including AXA, AIG, Manulife and Prudential plc," the UBS report states. "Although increasing opportunity in Asia may be inevitable, we do not expect it to outweigh the long-term opportunity for growth."

Reproduced from National Underwriter Edition, February 18, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.