Prudential Financial Inc.'s planned sale of its property/casualty business for a combined $673 million fits with what industry observers say will be a resurgence of insurance company deals.
A lack of capital and a wide gap between the expectations of sellers and buyers have kept insurance industry activity relatively stagnant in recent years.
But now pent-up demand is prompting more potential buyers to look for deals, said John Nigh, a principal and the M&A practice leader at Tillinghast-Towers Perrin in New York. "The fact remains that M&A has been down quite a bit during the past couple of years," he said, yet in a mature market like the United States, insurance companies need both acquisitions and organic growth to expand.
In Prudential's case, the sales announced on Thursday were another step in its makeover into a life insurance and financial services company. The company said it signed a definitive agreement to sell its property/casualty operations in 47 states to Liberty Mutual Group. It also has agreed to sell its New Jersey property/casualty business to Palisades Group.
The deals are expected to close by yearend. Upon closing Liberty Mutual will begin integrating Prudential's $1.1 billion of automobile and homeowners premium, as well as most of Prudential's 2,000 property and casualty employees, into its personal lines operations.
Prudential previously had announced the signing of a definitive agreement to sell Nationwide Mutual Insurance Co. its specialty automobile insurance business, THI Holdings Inc., for a total consideration of $142 million. This deal is expected to close in the third quarter.
Proceeds from the three planned deals would total about $815 million.
Prudential will continue to explore options regarding its remaining personal lines business, which markets auto and homeowners coverage at work sites, said Bob DeFillippo, a company spokesman. This business has a $30 million book value, he said.
Prudential's selling of noncore operations goes back to February when it sold control of its brokerage unit to Wachovia Corp. Prudential has a 38% ownership stake in the resulting brokerage company.
It has not been all selling for the Newark, N.J., insurance giant. In December, Prudential agreed to buy American Skandia, a variable annuity provider with a small presence in the bank channel.
Prudential is not ruling out further acquisitions, either, Mr. DeFillippo said.
"We're a financial services company with a substantial asset management business and a robust international insurance and investments business," Mr. DeFillippo said. Any deal that fits its current core businesses would be considered, he said.
As Liberty Mutual, Palisades, and Nationwide Mutual were buying business lines from Prudential this year, a recent study by Tillinghast-Towers Perrin found that most life insurance company chief financial officers think it is highly likely or possible that their company will buy a book of business in the next 12 months and nearly half think the same about the prospect of buying a whole company.
Though many potential sellers have been waiting for prices to get better, low interest rates, poor equity markets, and credit losses in the industry are forcing their hands.
Meanwhile, "there is a lot of capital-raising going on," said Tillinghast's Mr. Nigh, among companies that could become buyers. Mutual companies such as MetLife, Prudential, and John Hancock have positioned themselves to raise capital by going public in recent years.
"The biggest activity level will be consolidation among companies," he predicted, with smaller and midsize firms buying each other out. However, he also foresees "one or two spectacular deals" among the largest players.
In the last spate of insurance company mergers, European companies like Aegon, Prudential PLC, and ING were looking to buy in the United States. Mr. Nigh said this will happen again though more of the deals will be among U.S. companies.
However, Arthur M. Fliegelman, a vice president at Moody's Investors Service, said he thinks European buyers are likely to sit out this round. "Those companies have pretty full plates today," he said. In addition, he said, there is some evidence that "the results of some of their acquisitions may have been very disappointing."
Also, the market wisdom views the recent sharp depreciation of the dollar versus the euro as making U.S. assets less attractive to European companies.
Overall, Mr. Fliegelman said, more deals are likely to involve books of business or subsidiaries than whole companies, as Liberty Mutual is doing with its Prudential purchase.
Such smaller deals are "probably a lot more likely to work out. You know exactly what you are getting, and they are very specific, discrete, well-thought-out transactions," he said.
The economies of scale from combining two companies are not always obvious in the insurance sector, he said. In addition, he pointed out, "the general perception is that most transactions don't work particularly well for the acquiring shareholder."
Those shareholders may be less likely to support an acquisition or merger if they share that skeptical perception, he said.
Analysts agree that, despite some recent big-deal rumors, banks are unlikely to be buyers in the next phase of insurance company consolidation.
"There aren't too many banks lining up to buy insurers," Mr. Fliegelman said.
"As much as I would love to say banks and insurance companies are getting together," Mr. Nigh said, "I don't see it happening in the next 10 years." Though some banks and insurers might combine into large financial services conglomerates, he said, the true bancassurance model - with products and services integrated across the whole company - is still years away for U.S. firms.
Some banks and insurers are still toying with the idea - through alliances, discussions, and deal rumors - of combining. However, the deal that would have been the news of the year on this front never materialized.
News reports this month said that FleetBoston Financial Corp. had been in talks this spring to combine with John Hancock Financial Services Inc. but that the talks had been broken off.
John Hancock's chief executive officer, David D'Alessandro, has been an outspoken proponent of consolidation, though he has long tagged his company as a buyer, not a seller.
A spokesman for Hancock said the company would not comment further on consolidation in the industry.
Other insurance companies have also expressed interest in buying, including Manulife Financial Corp. of Canada. It tried to buy Canada Life this year but lost out to a bid from Great-West Lifeco of Winnipeg, Canada. That abortive venture suggests, however, that Manulife may still be looking.
Another Toronto insurer, Sun Life Financial, has already done deals in the United States, buying Keyport Life Insurance Co. in October 2001. A company spokesman said it does not comment on M&A plans.
Another deal rumor linked American International Group Inc., the giant insurer, with Capital One, a credit card company. However, the industry is still waiting for the rush of Citigroup-scale deals that were predicted after Gramm-Leach-Bliley's enactment in 1999.
Mr. Nigh said the most successful bank-insurer mergers that do occur are likely to be among regional companies, which "have more nimbleness." Once the industry sees success at that level, then the larger players will follow suit, he predicted.
But U.S. banks and insurers remain skittish of each other, he said, in part because of their different cultures but also because "of the perception on the part of banks that their fundamental economics are superior to that of insurance companies."
This feeling reflects a misunderstanding of what constitutes value in an insurance company, Mr. Nigh said.
The Tillinghast survey of CFOs at top life insurance companies said 71% felt it was highly likely or possible that their company would buy a block of business in the next 12 months and that 49% said it was possible or likely their company would acquire another company.
More than 75% of respondents said they expect to expand their presence in North America and Asia. Respondents were mixed about expansion prospects in Europe and mostly negative about expanding in Latin America.
The CFOs listed numerous reasons that their companies would consider buying or selling a business. For purchases, the two top objectives were profitable growth, mentioned by 82%, and expanding and enhancing distribution, cited by 52%.
But the executives were also aware of the problems of completing a deal. These included the "disconnect" between sellers' and buyers' views of value, cited by 52%, as well as capital issues and cash constraints, mentioned by 46%.
This year's was the first Tillinghast survey of CFOs on the M&A environment.
