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Insurance Merger Mania Kicks Off, and Health Insurers May Get in on the Action

The dry spell for insurance companies trying to merge with -- or gobble up -- other insurers is coming to an end, and that could mean more sales for AIG, as well as a burst of activity among healthcare insurers such as Aetna (AET) and Cigna (CI).

"We tracked M&A through March 15 -- not even one quarter -- and there's already been more deals in 2010 than in all of 2009," said Jerry Theodorou, vice president of research for Conning Research & Consulting. Accounting firm PricewaterhouseCoopers is also predicting a pickup in M&A in a report entitled, "On the Road Again -- Transactions in an Opportunistic Market."

M&A happens for the same reason that people buy homes or cars: folks with money feel more secure about the future. A better jobs report in conjunction with bullish talk from insurance laggards like AIG CEO Robert Benmosche and The Hartford (HIG) CEO Liam McGee may also be fueling the fire.

Insurers tend to buy at the bottom of the market when they see bargains, such as the two biggest recent deals: AIG's sale of its Alico unit to MetLife and its AIA unit to Prudential Plc, one of the U.K.'s largest life insurers (unaffiliated with Prudential Financial (PRU) of the U.S.). Conning's Theodorou thinks this activity indicates that insurance is now a "true global market" -- by contrast with past M&A waves that consisted largely of U.S. insurers buying one another. That market has declined as U.S. insurers have less free cash to play with.
"U.S. entities as buyers and sellers accounted for only 27 percent of worldwide global M&A in our study," said Theodorou. In addition to Prudential Plc, both Alico and AIA sell foreign life insurance.

Theodorou said that Asian companies, along with Latin American countries such as Brazil, are capital rich and ripe to go picking, and that AIG's ILFC aircraft leasing unit is low-hanging fruit. IFLC founder Steven Udvar-Hazy had looked like a potential buyer, but he has resigned as chairman of the unit, and Standard & Poor's recently downgraded its credit rating on fears that a sale would be further delayed, which could put pressure on Benmosche to spruce up the leasing business and get it sold.

Pent-up demand is particularly strong in the health insurance sector for two reasons. First, for better or worse, the health care reform debate has come to an end and potential buyers have a better sense of the potential risks and rewards. The new law provides a road map out to 2018. Second, profit margins for health insurers are low, only 2.7 percent, according to Theodorou, down from 4 to 5 percent a few years ago. To see economies of scale, those insurers need to merge, and quickly, he says.