MergerTalk:  After Spitzer, New Life or U.S. Insurance M&A?

Reuters
By Mark McSherry
August 11, 2005

By Mark McSherry

NEW YORK, Aug 11 (Reuters) - Life insurance companies may lead the way in merger activity for the broader U.S. industry over the next 12 to 18 months, but deals among brokers face hurdles following a probe of the industry.

Analysts expect at least one or two multibillion-dollar mergers in U.S. life insurance over the next year and a half, with French insurer Axa (AXAF.PA: Quote, Profile, Research) viewed as one possible buyer.

A spokesman for Axa, which bought U.S. life insurer MONY for $1.48 billion in 2004, would not comment.

Deals among life insurers will be driven at least in part by the big savings that can be achieved by merging their back-office functions, analysts said.

"I believe that we will continue to see life insurance consolidation, although the number of players that exist in the life insurance space is increasingly small," said Mark Adley, a managing director in the financial institutions banking group at Banc of America Securities.

"There are, call it 10 to 15 players in the life insurance sector in the United States that are all circling with each other and trying to figure out if or when they want to consolidate and with whom and under what terms," he said.

Elsewhere, potential acquisitions of insurance brokers have become complicated after New York Attorney General Eliot Spitzer's probe into bid-rigging and price-fixing abuses.

Experts said larger brokers may delay or even shy away from buying their smaller and medium-size broker counterparts because many target companies still rely heavily on controversial fees called contingent commissions.

Brokers receive contingent commissions based on the volume or profitability of business they provide to insurers.

The world's largest insurance brokers like U.S-based Marsh & McLennan Cos. (MMC.N: Quote, Profile, Research), Aon Corp. (AOC.N: Quote, Profile, Research) and Willis Group Holdings Ltd. (WSH.N: Quote, Profile, Research) abandoned contingent commissions under pressure from U.S. prosecutors, who said the payments were unethical kickbacks.

WFG Capital Advisors President Robert Lieblein said the contingent commissions issue is putting a damper on the mergers and acquisitions environment for insurance brokers.

"I think there will be some companies that previously would have been good acquisition candidates who no longer will be acquisition candidates," said Lieblein, whose investment bank operates in the insurance industry. "And for some companies that are still good acquisition candidates, it will probably take a little bit longer to get the deal done."

CONFLICT

Spitzer's investigations have rocked the insurance industry.

Marsh & McLennan in January agreed to pay $850 million to settle a bid-rigging probe.

In March, Aon agreed to pay $190 million to resolve allegations by regulators that it had secretly accepted hundreds of millions of dollars to steer clients to favored insurers.

In April, Willis Group agreed to pay $51 million to settle New York and Minnesota attorneys general's investigations of fraud and anti-competitive practices in the industry.

Longer term, analysts expect the big players to return to mergers as a vehicle for growth and do not rule out a combination of two of the large brokers at some stage.

Lieblein foresees the eventual return of Marsh, Aon and other larger brokers to the M&A arena -- if they are not sold themselves.

"People are not sure whether a Marsh or Aon or Willis may combine and consolidate themselves," he said. "There have been rumors about that -- but just rumors."

A spokesman for Willis Group would not comment on the company's acquisition strategy. Marsh & McLennan officials were not immediately available, but an Aon spokesman said: "Our emphasis is on building the business organically."