M&A seen dominating life insurance industry

NEW YORK — Mergers and the battle to maintain market share will dominate the agendas of many life insurers over the next 12 to 18 months, according to analysts and company executives at a Standard & Poor’s insurance conference here last week.
There will be more consolidation in the sector, especially now that insurers have become emboldened by the success of recent acquisitions by Manulife Financial Corp. of Toronto and Prudential Financial Inc. of Newark, N.J., said Kevin Ahern, a director and sector specialist with New York-based S&P’s life insurance division.
Also, smaller life insurers are finding it difficult to maintain market share without resorting to aggressive pricing, and many are having difficulty obtaining shelf space with distributors, noted Grace Osborne, managing director of S&P’s financial services ratings.

Foreign invasion
In addition to domestic mergers, insurers from outside the United States will seek a stronger foothold in this country because of the aging population’s retirement needs, said Jon Reichert, a director of S&P’s financial services rating group.
“The underserved middle market in the U.S. is very attractive to European companies,” said Darryl Button, senior vice president and chief financial officer of Baltimore-based AEGON USA Inc., whose parent company is AEGON NV of The Hague, Netherlands.
One part of the market in which AEGON USA plans to become more active is life settlements, he added.
“Life settlements support a legitimate change in client needs,” Mr. Button said. But the insurer is opposed to investor-initiated life insurance, which “flies in the face of insurable-interest laws,” he said.
One roadblock to entering the U.S. market is complying with the Sarbanes-Oxley Act, Mr. Button noted. “The act was a knee-jerk reaction to the Enron [Corp. of Houston] and WorldCom [Inc. of Clinton, Miss.] scandals,” he said.
The law is “overcooked, overbaked and a drag on society and the economy,” Mr. Button added.
Recent guidance by the Securities and Exchange Commission emphasizing a “top-down, risk-based approach” to SOX enforcement may help insurance companies, but auditing firms will “remain paralyzed” by the law, he said.
Great-West Life & Annuity Insurance Co. of Winnipeg, Manitoba, made a major U.S. acquisition this year, agreeing to acquire Boston-based Putnam Investments, noted Mitchell Graye, the insurer’s executive vice president and chief financial officer.
Putnam’s scale and “instant name recognition” were attractive to Great-West and its parent, Montreal-based Power Financial Corp., he said.
“In the U.S. retirement services market, Putnam gives us a better brand than Great-West,” Mr. Graye said. While the insurer is well known in Canada, it lacks comparable appeal in this country, he noted.
Mr. Graye declined to respond to a question about how the insurer plans to overcome Putnam’s tarnished reputation as a result of its involvement in the market-timing scandals a few years ago, and adviser defections.
“Because the deal has not yet closed, executives cannot discuss that issue,” he said.
Guarantees unnerve
Despite insurers’ insistence that they will be able to honor variable annuity guarantees, some in the industry remain unconvinced.
About 70% of new VA sales contain a guaranteed living benefit, but no one knows how the benefits will be used, Mr. Ahern said.
“The industry is shifting from death benefits to living benefits — bringing more risk and uncertainty over how the new options will be exercised,” he said.
Universal life insurance has been the strongest product in terms of sales growth, with premiums up 11% to 16% annually for the past three years, Mr. Ahern said. He credited no-lapse features, the product’s popularity with aging boomers, and insurers’ shift to selling through independent producers who prefer universal life.
But continued growth at that pace “is not sustainable,” Mr. Ahern noted, due mainly to the “re-pricing” of older policies because of pending regulatory changes mandating higher reserves.
Overall, the industry this year won’t match last year’s 7% sales growth, as insurers will continue to retreat from the investor-owned-life-insurance market due to regulatory concerns, he predicted.
Equity index annuities won’t be a growth product in the next 12 months, due to their “complex design, high fees and continued suitability concerns,” Mr. Ahern said. For other types of fixed annuities, sales will decline, because bank certificates of deposit with which they compete will be more attractive to investors, he added.

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